SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report: October 16, 1998
AT&T CORP.
A New York Commission File I.R.S. Employer
Corporation No. 1-1105 No.13-4924710
32 Avenue of the Americas, New York, New York 10013-3412
Telephone Number (212) 387-5400
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Form 8-K AT&T Corp.
October 16, 1998
Item 5. Other Events.
AT&T is making available its audited consolidated financial results and certain
other information for the year ended December 31, 1997 restated to reflect the
merger with Teleport Communications Group, Inc. on July 23, 1998 which was
accounted for as a pooling of interests. In addition, prior periods' results
have been reclassified for a change in accounting for wireless inroaming
revenues and to conform to the 1998 presentation.
1. Report of Independent Accountants.
2. Management's Discussion and Analysis.
3 Five-Year Summary of Selected Financial Data.
4. Consolidated Statements of Income for the Years Ended December 31, 1997,
1996, and 1995.
5. Consolidated Balance Sheets at December 31, 1997, and 1996.
6. Consolidated Statements of Changes in Shareowners' Equity for the Years Ended
December 31, 1997, 1996, and 1995.
7. Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
1996, and 1995.
8. Notes to Consolidated Financial Statements.
AT&T is also making available its restated unaudited consolidated financial
results and certain other information for the period ended June 30, 1998. Filed
as Exhibit 99.1 to this 8-K is the following information:
1. Management's Discussion and Analysis for the Six Months Ended June 30, 1998.
2. Unaudited Consolidated Statements of Income for the Six Months Ended June 30,
1998 and 1997.
3. Unaudited Consolidated Balance Sheets at June 30, 1998 and December 31, 1997.
4. Unaudited Consolidated Statements of Changes in Shareowners' Equity for the
Six Months Ended June 30, 1998 and June 30, 1997.
5. Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June
30, 1998 and June 30, 1997.
6. Notes to Consolidated Financial Statements.
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Form 8-K AT&T Corp.
October 16, 1998
Item 7. Financial Statements and Exhibits.
(c) Exhibits.
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
Exhibit 23 Consent of Independent Accountants
Exhibit 27 Financial Data Schedules.
Exhibit 99.1 AT&T Corp. unaudited consolidated financial results
and certain other information for the six months
ended June 30, 1998.
Exhibit 99.2 Quarterly Consolidated Statements of Income for 1998
and 1997.
Exhibit 99.3 Unaudited Condensed Statements of Income for the
month ended August 31, 1998 and unaudited Condensed
Balance Sheet at August 31, 1998.
Report of Independent Accountants on financial statement schedule
Schedule II - Valuation and Qualifying Accounts
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Form 8-K AT&T Corp.
October 16, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners of AT&T Corp.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and changes in shareowners' equity and of cash
flows present fairly, in all material respects, the financial position of AT&T
Corp. and its subsidiaries (AT&T) at December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of AT&T's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits on these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York, New York
January 26, 1998 (September 23, 1998 as to Note 15)
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Form 8-K AT&T Corp.
October 16, 1998
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
October 15, 1998
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Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS - FOR THE YEAR ENDED DECEMBER 31, 1997
January 1, 1997, marked a beginning for AT&T. The challenge of completing the
"trivestiture" was behind us and we entered the new year as a new company -- one
better focused and prepared to face the increasingly competitive and dynamic
telecommunications industry. As our experience in 1997 proved, however, the most
challenging period in this company's history did not end with trivestiture.
Rather, we had just begun the work needed to position ourselves strategically
and financially in order to grow profitably in the years to come.
Change and complexity characterized the industry in 1997. New services
continued to emerge -- services like voice over the Internet and Internet
Protocol(IP) networks. Digital technology continued to revolutionize the
wireless communications business. Demand for data transmission services such as
frame relay multiplied, and corporations demanded help managing their ever more
complex, more global telecommunications needs. The maze of regulatory issues
impacting our business grew more and more intricate. Even the very structure of
the industry changed as companies from all parts of the industry looked for
partners to help them become providers of complete offerings of
telecommunications services.
As if all this wasn't challenging enough in 1997, competition intensified in
our long-distance and wireless businesses where we faced some of the stiffest
competitive conditions around. Aggressive industry pricing practices put
pressure on our margins in long-distance services for businesses. The
competition used price and innumerable other tactics to attack our residential
base and new competitors entered wireless markets all over the country with
aggressive offers.
Our mission for 1997 was to take the critical actions needed to prepare AT&T
for the future. Our ultimate ability to deliver shareowner value depends on the
strategic position and the financial strength and flexibility that we create for
ourselves today. But we also understand the need to balance concern for the
future with our investors' expectations for solid financial performance in the
present.
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Form 8-K AT&T Corp.
October 16, 1998
So in 1997, we did invest for the future. We invested in our local service
initiative which reduced earnings before interest and taxes (EBIT), including
other income, by almost $1 billion and earnings before interest, taxes,
depreciation and amortization (EBITDA), including other income, by over $750
million and reduced earnings per share by about $0.32. We did not get the return
we wanted on this investment, so we made the important economic decision to
discontinue our efforts to sell local service to residential customers on a
total services resale basis. We remain committed to providing local service to
our residential customers, but only when an economically viable means of doing
so can be developed.
On the business side, we accelerated our local entry in January 1998 when we
executed a merger agreement with Teleport Communications Group, Inc. (TCG), the
largest competitive local exchange carrier. On July 23, 1998, AT&T completed the
merger. Each share of TCG common stock was exchanged for 0.943 of AT&T common
stock resulting in an issuance of 181.6 million shares in the transaction. The
merger was accounted for as a pooling of interests, and accordingly, AT&T's
historical financial statements have been restated to reflect the combined
results of AT&T and TCG. TCG brings to AT&T local facilities in 83 of the top
U.S. markets, along with the management expertise we need to win in the business
local market. The TCG deal, valued at about $11 billion, is expected to generate
over $1 billion in synergies in 1999, growing to $2.2 - $2.5 billion in 2002.
We also continued to develop businesses that are important to our long-term
success. These businesses include international markets (excluding bilateral
traffic), AT&T Solutions -- our outsourcing, consulting and networking
integration professional services business; AT&T WorldNet -- our Internet access
service for homes and businesses, and wireless service in new 1.9 GHz markets.
We invested heavily in these businesses in 1997; they further reduced AT&T's
EBIT by more than $1.6 billion, EBITDA by more than $1.3 billion and earnings
per share* by about $0.55 for the year.
*All earnings per share information in this discussion is presented on a diluted
basis, meaning that the share balance used in the calculation includes shares
outstanding plus shares that may be issued as a result of the exercise of
options.
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Form 8-K AT&T Corp.
October 16, 1998
We continued to invest in our core long-distance business as well. The AT&T
long-distance network handled a record volume of traffic in 1997, including a
new one-day record of 319 million calls on the Monday after Thanksgiving.
Approximately 99.96% of these calls were completed on the first try. In order to
maintain this level of capacity and reliability, as well as respond to new
demands, we invested the majority of our capital spending in 1997 in the
long-distance network, deploying Synchronous Optical Network (SONET) technology
rings across the country and increasing the capacity of our data networks.
All this investment, plus the effects of competition on our core long-distance
and wireless businesses, put a strain on our financial performance. As a result,
our 1997 earnings were down from the prior year, as explained below in the
discussion of our financial results for the year. But again, we recognize the
need to balance investment with current earnings and to have maximum financial
flexibility in this growing industry. Therefore, we moved aggressively to shore
up our financial position and stabilize our earnings. We continued to divest
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Form 8-K AT&T Corp.
October 16, 1998
assets and businesses not critical to our long-term strategy. We completed the
sales of AT&T Tridom, AT&T Skynet, our submarine systems business and our
investment in DirecTV. Additionally, in 1997 we reached agreements to sell UCS,
AT&T Solutions Customer Care, and our holdings of LIN Television Corporation and
WOOD-TV. We also reduced our strategic investment in SmarTone Communications. As
of September, 1998 all of these businesses have been sold with the exception of
Wood-TV, which is expected to close in the fourth quarter of 1998. All told,
these transactions have generated over $12 billion in cash for AT&T (pretax). As
a result, our already solid balance sheet has become even stronger.
In order to deliver on the earnings expectations of our investors and to
position ourselves for the future, we attacked our cost structure aggressively
in 1997 and intend to do a lot more in 1998 and beyond. As a result of our cost
reduction efforts, our selling, general and administrative (SG&A) expenses
declined in the fourth quarter of 1997. Our earnings, after hitting the
low-water mark in the second quarter, showed sequential improvement in the third
and fourth quarters. EBITDA also trended upward in the second half. Further, we
expect to reduce SG&A by $1.6 billion in 1998 (excluding TCG) and our goal is to
achieve a level of SG&A expenses equal to 22% of revenues by the end of 1999.
On January 26, 1998, we announced a plan to reduce headcount by 15,000 to
18,000 over two years as part of the Company's overall cost reduction program.
In connection with this plan, a voluntary retirement incentive program (VRIP)
was offered to eligible management employees. Approximately 15,300 management
employees accepted the VRIP offer. During the second quarter of 1998 AT&T
recorded restructuring charges of $2,743 million ($1,694 million after-tax)
primarily in connection with the VRIP offer. The restructuring charges of $2,743
million will be partially offset by approximately $1.1 billion of gains to be
recognized in the third and fourth quarters of 1998 as employees' pension
benefit obligations are settled. The amount of gains to be recognized in future
periods is subject to market fluctuations. Due to the capital market downturn
and the lowering of the discount rate, as of the beginning of October, we
estimate that the gains will be $0.7 billion.
Shareowners recognized our efforts in 1997. AT&T was the top performing stock
in the Dow Jones Industrial Average (DJIA) for the six months ending December
31, 1997, and had the seventh-highest appreciation among the Dow stocks for the
full year. Our stock generated a total return, including dividends, of over 53%
in 1997. We hope to continue to produce a high return in 1998 and beyond by
delivering earnings growth.
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Form 8-K AT&T Corp.
October 16, 1998
OPERATING RESULTS
Our income from continuing operations decreased $1,209 million, or 22.2%, in
1997 and increased $445 million, or 8.9%, in 1996. Lower earnings from the core
business and increased dilution from investments in initiatives contributed
almost equally to the decline in earnings in 1997. Core earnings were lower due
primarily to higher depreciation and amortization expenses driven by higher
levels of capital investment. In 1997 we invested $7.7 billion in capital, the
majority of which was directed toward increasing the capacity and technology of
our long-distance and wireless networks, including the installation of SONET
facilities. We expect to complete our SONET program in 1998 with a total of 52
rings providing coast-to-coast connectivity. Our local service efforts and our
expansion into new wireless markets were the primary drivers of the increase in
dilution from initiatives in 1997.
In 1995 our core business recorded pretax charges of $3,023 million of
restructuring and other charges. The charges covered consolidating and
reorganizing numerous corporate and business units over several years. The total
impact on income from continuing operations was $2,032 million, or $1.17 per
share. The impact on income from discontinued operations was $3,321 million, or
$1.91 per share. The impact on net income was $5,353 million, or $3.08 per
share. Discussions presented here exclude the impact of these charges unless
noted.
Dollars in Millions
For the Years Ended December 31 1997 1996 1995*
Income from Continuing Operations $4,249 $5,458 $5,013
Income from Discontinued Operations 100 173 425
Gain on Sale of Discontinued
Operations 66 162 -
Net Income $4,415 $5,793 $5,438
Earnings Per Share - Diluted:
Income from Continuing Operations $ 2.38 $ 3.09 $ 2.88
Income from Discontinued Operations 0.05 0.10 0.25
Gain on Sale of Discontinued
Operations 0.04 0.09 -
Net Income $ 2.47 $ 3.28 $ 3.13
Earnings Per Share - Diluted:
Core $ 3.25 $ 3.64 $ 3.06
Initiatives (0.87) (0.55) (0.18)
Total Continuing Operations $ 2.38 $ 3.09 $ 2.88
*Excludes restructuring and other charges
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Form 8-K AT&T Corp.
October 16, 1998
Income related to discontinued operations, including gains on disposals, was
$166 million in 1997 and $335 million in 1996. As of December 31, 1997, UCS was
the only business remaining in discontinued operations. On April 2, 1998, AT&T
sold AT&T Universal Card Services, Inc. (UCS) for $3,500 million to Citibank. In
addition, we received $5,722 million as settlement of receivables from UCS. We
completed the sale of our submarine systems business in the third quarter of
1997, and in 1996 we successfully divested Lucent, NCR, AT&T Capital and other
businesses.
REVENUES
We reported our 1997 revenues in five categories: business and consumer
services, wireless services, other and corporate, and eliminations. Total
revenues grew $889 million, or 1.8%, in 1997 and $2,239 million, or 4.6%, in
1996.
Dollars in Millions
For the Years Ended December 31 1997 1996 1995
Business services $22,030 $21,491 $20,421
Consumer services 23,527 24,184 23,917
Wireless services 4,668 4,246 3,639
Other and corporate 2,704 1,892 1,530
Eliminations (1,352) (1,125) (1,058)
Total revenues $51,577 $50,688 $48,449
Business services revenue increased $539 million, or 2.5%, in 1997 and $1,070
million, or 5.2%, in 1996. Business long-distance services revenue, made up
primarily of revenue from voice and data services, and related products sales,
is the main contributor to the growth reflecting an increase of $516 million, or
2.4%, in 1997 and the entire increase in 1996. Adjusted for the sales of AT&T
Skynet and AT&T Tridom, business long-distance revenue grew 3.1% in 1997. Strong
growth in revenue from data services -- frame relay and other emerging services
as well as private line -- drove the increase in business revenue. Revenue
growth from voice services was hampered by pricing pressure brought on by a
number of factors. Many voice service contracts were renegotiated during the
year, encouraged by uncertainty surrounding the possibility of detariffing.
Competitive pressure caused many of these contracts to be renegotiated at lower
rates. Also, reductions in access costs were passed to customers in the form of
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Form 8-K AT&T Corp.
October 16, 1998
lower rates, further pressuring revenue growth. Revenue growth in 1996 was
fueled by both strong growth in business inbound (toll-free 800 and 888
services) and data services.
Calling volume, or billed minutes, in business long-distance services grew in
the mid-teens in both 1997 and 1996, both led by strong volume growth in inbound
services as well as growth in outbound services and government markets. Again,
lower price levels on voice contracts substantially offset the growth in calling
volume though the pricing environment began to show signs of stabilization in
the fourth quarter of 1997.
Consumer services revenue declined $657 million, or 2.7%, in 1997 and
increased $267 million, or 1.1%, in 1996. Consumer long-distance services, the
primary revenue driver, declined $697 million, or 2.9%, in 1997 and increased
$266 million, or 1.1%, in 1996. However, our 1997 revenue growth was impacted by
a number of strategic choices intended to improve profitability. For instance,
we accelerated the use of free minutes as a customer incentive in 1997,
increasingly using them in place of checks. Since free minutes are presented as
contra-revenue on the income statement while checks are classified as a
promotional expense, our move toward free minutes served to reduce revenue
growth. This shift, plus the effects of flowing savings from access reform
through to customers resulting in lower prices, accounted for 2 percentage
points of the 2.7% decline in revenue. The remaining decline was primarily due
to another move designed to improve long-term profitability -- the migration of
customers to more favorable calling plans. This is a key element in our strategy
to retain our most profitable customers. Partially offsetting the declines was
growth in intraLATA, or local-toll services. Presubscription processes allowing
customers to choose AT&T as their preferred local-toll carrier helped revenue
from these services grow substantially in 1997. In 1996 the increase in consumer
revenue was driven by price increases instituted throughout the year.
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Form 8-K AT&T Corp.
October 16, 1998
Another element in our strategy to attract and retain the most profitable
residential customers and to improve our bottom line was to refine our marketing
efforts in the second half of the year so that the customer base we targeted for
acquisition would not include customers who are not profitable to us. While not
having a material impact on consumer revenue or volume for the full year 1997,
this strategic shift may cause further pressure on these measures in the future.
Consumer calling volume increased by a low-single-digit percentage in 1997
compared with a decrease of a similar magnitude in 1996. The increase was due to
strong growth in intraLATA volume, again as a result of capturing the
opportunity offered by local-toll presubscription, while in 1996 declines in
domestic volumes were partially offset by growth in international volumes.
Total long-distance services revenues -- the sum of the business and consumer
categories -- was $45,490 million in 1997, essentially flat compared with
$45,671 million in 1996. Volume increased 8.7% for the year. In 1996
long-distance revenues increased $1,336 million, or 3.0%, on a volume increase
of 5.9%. The gap between volume and revenue growth widened to 9.1% in 1997 due
to the revenue factors mentioned above, including the flow-through of access
charge reductions, and also due to the growth in lower-priced services such as
intraLATA. The 1996 gap reflected the impact of promotional discounts, increased
movement of customers to optimal calling plans and increased discounts given to
large accounts. In addition, international volumes increased in 1996 while
international revenue remained relatively flat.
Wireless services revenue, which includes wireless voice and data, messaging,
air-to-ground services, product sales, and costs associated with fixed wireless
development increased $422 million, or 9.9%, in 1997. Revenue from AT&T's new
1.9 GHz markets is included in this figure, although its impact on the annual
growth rate was minimal. Adjusted for the impact of wireless properties disposed
of in December 1996, the 1997 revenue growth rate would have been 12.5%. The
revenue growth was driven by consolidated subscriber growth of 18.5%
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Form 8-K AT&T Corp.
October 16, 1998
in 1997. In 1996 wireless revenue increased $607 million, or 16.7%, on a 30.4%
increase in subscribers. The slower rates of growth in 1997 reflect the
increased competition that characterized the wireless industry in 1997.
Competition was particularly fierce in the southwestern and western areas of the
U.S. where the introductory offers of new market entrants were often met with
equally competitive offers from incumbent cellular competitors. The lower growth
rates also reflect the fact that while new competitors have had a significant
impact in many of our cellular (850 MHz) markets, we are just beginning to
penetrate new markets with AT&T Digital PCS service on the 1.9 GHz spectrum.
Finally, similar to our consumer strategy, toward the end of 1997 we began
focusing our efforts on targeting high-value wireless customers and reducing
sales to lower-end subscribers. While this strategic move impacted both revenue
and subscriber growth rates in 1997, and will continue to impact these growth
rates in 1998, it is designed to improve the profitability of the wireless
business.
This strategic shift, if successful, will help support our average revenue per
user (ARPU) over time. In 1997 the impact of industry-wide competitive pricing
pressure, along with increased "convenience" usage of wireless phones, overcame
any benefit from our high-value strategy. ARPU in our existing cellular markets
fell to $60 per month from approximately $67 in 1996 and $76 in 1995.
Wireless customers, or subscribers, in markets where AT&T owns a majority
interest (consolidated markets), stood at 6.0 million at December 31, 1997. This
included over sixty thousand subscribers in our new 1.9 GHz markets. Cellular
subscribers at December 31, 1996, and 1995 were 5.0 million and 3.9 million,
respectively. Cellular subscribers in markets in which we have or share a
controlling interest were 8.1 million at December 31, 1997, up 16.8% from 7.0
million at December 31, 1996. Cellular customers on this basis were 5.5 million
at December 31, 1995.
Revenue for other and corporate increased $812 million, or 43.0%, in 1997 and
$362 million, or 23.7%, in 1996. The 1997 increase resulted primarily from
increases in AT&T Solutions related primarily to outsourcing revenue, as well as
revenue from TCG, AT&T WorldNet and international markets. AT&T Solutions,
comprised primarily of outsourcing revenue, and local revenue from TCG drove the
increase in 1996.
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Form 8-K AT&T Corp.
October 16, 1998
Eliminations reflect the elimination of revenues for services sold between
categories (e.g., sales of business long-distance services to other AT&T units).
OPERATING EXPENSES
For the year, operating expenses totaled $44,741 million, an increase of 6.6%
from $41,979 million in 1996. In 1996 expenses increased 4.3% from $40,257
million in 1995.
Dollars in Millions
For the Years Ended December 31 1997 1996 1995
Access and other interconnection $16,350 $16,363 $17,647
Access and other interconnection expenses are the charges that we pay to connect
calls on the facilities of local exchange carriers and other domestic service
providers, and fees that we pay foreign telephone companies (settlements) to
connect calls made to and from foreign countries on our behalf. These charges
are designed to reimburse these carriers for the common and dedicated facilities
and switching equipment used to connect our network with theirs. These costs
remained essentially flat in 1997 as lower per-minute access costs were offset
by solid volume growth and a beneficial second quarter 1996 accounting
adjustment of previously estimated accruals to reflect actual billing. The lower
per-minute access costs are primarily the result of declines in international
settlement rates and access charge reform mandated by the Federal Communications
Commission (FCC) effective for the second half of 1997. Interstate and
intrastate tariff reductions, changes in traffic mix and network planning also
contributed to the lower per-minute access costs.
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Form 8-K AT&T Corp.
October 16, 1998
In 1996 access costs declined $1,284 million, or 7.3%, again due to lower
per-minute access costs. This resulted from changes in the price-setting
methodology approved by the FCC effective in the second half of 1995, and also
from improvements in our infrastructure and reduced international settlements
payments. The beneficial accounting adjustment mentioned above also contributed
to the reduction.
Access and other interconnection expenses were 31.7% of revenues in 1997,
32.3% in 1996 and 36.4% in 1995. We expect this percentage to continue to
decline over time as we realize synergies from our merger with TCG.
Dollars in Millions
For the Years Ended December 31 1997 1996 1995
Network and other
communications services $9,412 $8,063 $6,913
Network and other communications services expenses include the costs of
operating and maintaining our network, operator services, non-income taxes, the
provision for uncollectible receivables and compensation to payphone operators.
More than half of the $1,349 million, or 16.7%, increase in 1997 was due to
higher costs for initiatives, particularly AT&T Solutions, AT&T WorldNet, local
service and wireless initiatives. The remaining increase was primarily driven by
FCC-mandated compensation to payphone operators and higher expenses for
operating and maintaining our network. Expenses for operating and maintaining
our network increased due to higher costs for purchases from Lucent at retail
and otherwise remained essentially unchanged despite increased calling volumes
and the increased complexity of our service offerings.
Growth in payphone compensation expense decelerated in the fourth quarter when
the FCC agreed to a reduction in the per-call rate from $0.350 to $0.284. As a
result of this action in the fourth quarter of 1997, AT&T was able to reverse
some of the expense previously accrued in 1997.
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Form 8-K AT&T Corp.
October 16, 1998
Network and other communications services expenses increased $1,150 million,
or 16.6%, in 1996. The increase was due to increased costs from our expansion
into new initiatives, enhancements made in customer care facilities and a higher
provision for uncollectibles.
Dollars in Millions
For the Years Ended December 31 1997 1996 1995
Depreciation and amortization $3,982 $2,819 $2,623
Depreciation and amortization expenses increased $1,163 million, or 41.3%, in
1997. The increase was driven by higher levels of capital expenditures which
totaled $3.1 billion in the fourth quarter of 1996 and $7.7 billion in 1997. In
addition to higher volumes of purchases, the impact of purchasing assets at
retail from Lucent also contributed to the higher level of capital spending. The
1997 expenditures were primarily for our long-distance and wireless networks,
including the deployment of SONET. We also invested substantial capital in
building our capability for local and WorldNet services. These capital
investments were required to provide for growth in calling volumes, to increase
capability, to introduce new technology, to enhance reliability, to expand our
wireless footprint and to establish a local presence. We expect depreciation and
amortization expenses to increase further in 1998 as we continue to expand and
enhance our network.
Depreciation and amortization increased $196 million, or 7.5%, in 1996. The
increase was primarily the result of investment in the network partially offset
by the impact of asset write-downs at the end of 1995.
Dollars in Millions
For the Years Ended December 31 1997 1996 1995
Selling, general and administrative $14,997 $14,734 $13,074
SG&A expenses increased $263 million, or 1.8%, in 1997. SG&A expenses were 29.1%
of revenues in both 1997 and 1996 and 27.0% of revenues in
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Form 8-K AT&T Corp.
October 16, 1998
1995. While investment in initiatives and spending on transitory projects, such
as preparation of our systems for the year 2000 ($113 million), put upward
pressure on SG&A expenses in 1997, core SG&A spending declined for the year as a
result of our efforts to achieve a competitive cost structure. The decline in
core SG&A expenses came primarily from lower advertising expenses across the
company, lower acquisition costs in consumer markets -- primarily a reduction in
the use of checks to acquire customers, and lower marketing and sales expenses
in business markets. Our year-over-year growth in SG&A expenses declined each
quarter in 1997.
Partially offsetting our savings were higher retention and acquisition costs
in wireless markets. We invested heavily in migrating wireless customers to
digital service in 1997, which lowers costs over time. These migration costs
plus the costs of
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Form 8-K AT&T Corp.
October 16, 1998
servicing a growing wireless customer base caused the increase in overall
wireless customer costs. However, cost per customer acquisition in cellular
markets was 4.7% lower in 1997 than in 1996 as a result of our focus on less
expensive distribution channels.
Selling, general and administrative expenses increased $1,660 million, or
12.7%, in 1996 due to expenditures for new initiatives, higher marketing and
sales expenses, and enhancements to customer care facilities. Our initiatives
represented about 40% of our increase in 1996.
We have established processes for evaluating and managing the risks and costs
associated with preparing our systems, global networks 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, global
networks and applications. We expect the cost of this project to be
approximately $300 million in 1998. More than half of these costs represent
internal information technology resources that have been redeployed from other
projects and are expected to return to these projects upon completion. We plan
on having substantially all modifications completed by the end of 1998, leaving
a full year for testing. We are still assessing the impact to us, if any, in
1999.
Also included in SG&A expenses were $851 million, $822 million and $727
million of research and development expenses in 1997, 1996 and 1995,
respectively. Research and development expenditures are mainly for work on
advanced communications services and projects aimed at IP services.
Dollars in Millions
For the Years Ended December 31 1997 1996 1995
Other income - net $443 $405 $270
Other income - net in 1997 included the gain on the sale of AT&T Skynet ($97
million), gains and losses on sales of cellular investments, increases in the
value of corporate-owned life insurance policies on officers, net equity
earnings from investments and other miscellaneous transactions, none of which
are individually significant.
In 1996 other income - net included sales and exchanges of cellular
properties, increases in the value of corporate-owned life insurance policies on
officers, net equity earnings from investments and other miscellaneous
transactions. In addition, other income for 1996 included a loss on our
investment in Novell, Inc.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
Dollars in Millions
EBIT
For the Years Ended December 31 1997 1996 1995
Total AT&T* $7,279 $9,114 $8,462
Wireless services $265 $627 $430
*Excludes restructuring and other charges of $3,023 in 1995
EBIT decreased $1,835 million, or 20.1%, in 1997 primarily as a result of
increases in network and other communications services expenses and depreciation
and amortization expenses partially offset by increased revenues. As discussed
above, the higher depreciation expense relates primarily to our core business,
while investment in initiatives drove the increased network and other
communications services expenses. The $652 million, or 7.7%, increase in 1996
was primarily due to an increase in revenues and a decrease in access and other
interconnection expenses partially offset by increases in both SG&A expenses and
network and other communications services expenses.
Wireless services EBIT in 1997 contained a $160 million charge to exit the
two-way messaging business as well as increased dilution from wireless
initiatives. EBIT for wireless services for 1996 contained a gain on the
exchange of several wireless properties.
Dollars in Millions
For the Years Ended December 31 1997 1996 1995
Interest expense $307 $417 $514
Interest expense decreased $110 million, or 26.4%, in 1997 due to lower levels
of average debt and a higher proportion of capitalized interest partially offset
by higher average interest rates on debt. Average debt was higher in 1996 due to
the additional debt associated with Lucent. We capitalized a greater proportion
of our interest expense in 1997 primarily due to higher qualifying assets for
our local initiative.
Interest expense decreased $97 million, or 18.9%, in 1996 compared with 1995
due to lower levels of average debt and a higher proportion of capitalized
interest partially offset by a higher average interest rates on debt. Lower
levels of average debt were primarily attributable to the assignment of debt to
Lucent and the application of the proceeds from the sale of AT&T Capital.
Dollars in Millions
For the Years Ended December 31 1997 1996 1995*
Provision for income taxes $2,723 $3,239 $2,935
*Excludes restructuring and other charges of $991
The effective income tax rate is the provision for income taxes as a percentage
of income from continuing operations before income taxes. The effective income
tax rate was 39.0% in 1997, 37.2% in 1996 and 36.9% in 1995. The effective tax
rate in 1997 was impacted by investment dispositions announced in 1997. The 1996
effective income tax rate was reduced by tax benefits associated with various
legal entity restructurings while the 1995 rate was favorably impacted
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
by lower state tax rates and higher research credits. The 1995 effective tax
rate including restructuring and other charges was 39.5%.
GROWTH INITIATIVES
We have undertaken a number of initiatives in order to ensure that we have a
complete portfolio of services that customers demand. While these initiatives
currently have a dilutive impact on our earnings, they are expected to
contribute significantly to our future earnings and revenue growth. The
following are summaries of these initiatives and their impacts on our earnings
for the last three years. 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.
Accordingly, all data presented represent approximate amounts.
Dollars in Millions
Local Services Initiative
For the Years Ended December 31 1997 1996 1995
EBIT $ (991) $ (466) $(185)
EBITDA $ (764) $ (378) $(147)
Capital Expenditures $ 1,308 $ 892 $ 155
We continue to work to provide local service to business and residential
customers across the country. In 1997 we introduced AT&T Digital Link local
service for medium- and large-sized businesses. At the end of 1997 AT&T Digital
Link service was available in 49 states for outbound local calling. Inbound
capability, however, was and remains delayed by the lack of local number
portability and other factors. Our merger with TCG is an aggressive move to
expand our reach and propel our entry into the market for business local service
and dedicated access. TCG services enhance our ability to provide integrated
end-to-end services for large and small business customers. AT&T can now offer
single points of contact for local and long-distance services and customer care,
enterprise solutions for businesses with multiple locations, volume discounts
across services and an integrated bill for customers who want it. We are
integrating local service into our business offers throughout TCG's 83 markets.
In residential markets at the end of 1997 we offered resold local service in
seven states. However, in spite of strong demand, in the fourth quarter we
stopped actively marketing resold local service to residential and small
business customers in most of these areas because of the limitations on the
local exchange carriers' ability to handle anticipated demand and because the
discounts we receive from the local exchange carriers on the sale of these
services are insufficient to make resale a viable long-term method of offering
service. The economic conditions of the total services resale approach simply do
not allow us to provide local service profitably.
During the first quarter of 1998 AT&T recorded a pre-tax charge of $601
million related to the Company's decision not to pursue Total Services Resale
(TSR) as a local service strategy. The impact on net income was a reduction of
$371 million. In addition, certain fixed assets which were purchased as part of
the TSR initiative may also be impaired. These assets are currently being
evaluated in conjunction with the TCG merger to determine if any assets are
impaired. Management expects to complete this review by the end of the fourth
quarter.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
Nevertheless, despite the difficulty of the regulatory environment, local
service is a key growth opportunity and AT&T continues its financial and
operational review of the various alternatives for entering the local market,
including the impacts associated with the merger of TCG and the pending
acquisition of Tele-Communications, Inc.
(TCI).
Dollars in Millions
Wireless Initiatives
For the Years Ended December 31 1997 1996 1995
EBIT $(559) $(170) $ -
EBITDA $(426) $(148) $ -
Capital Expenditures $ 896 $ 842 $ -
Our wireless initiatives include wireless service in new markets, wireless data
services, two-way messaging as well as the technology associated with fixed
wireless development. Our primary wireless initiative is to provide services in
new markets on the 1.9 GHz spectrum purchased in the FCC's "A and B Block"
auction in 1996. During 1997 we activated nine systems: Phoenix/Tucson in the
second quarter; Atlanta and Chicago in the third quarter, and Philadelphia,
Washington D.C./Baltimore, Cleveland, Charlotte, St. Louis and Detroit in the
fourth quarter. In addition, we activated our system in Boston in January 1998.
These markets extend the availability of AT&T Digital PCS, which has already
been introduced in AT&T's 850 MHz markets, and extends into Canada through our
partnership with Cantel. Also, in order to extend the reach of AT&T's digital
wireless services, we have announced a number of partnerships with other
wireless carriers. Through September 1998 we had announced agreements with
Tritel, Inc., Triton PCS, Telecorp, and Cincinnati Bell, as well as an
interoperability agreement with Dobson Communications. These agreements will
allow us to achieve a build-out of certain license areas with minimal capital
investment.
The increased EBIT dilution from wireless initiatives in 1997 primarily
relates to a $160 million charge to exit the two-way messaging business, as well
as expenses related to the activation of the new 1.9 GHz markets.
Dollars in Millions
Other Initiatives
For the Years Ended December 31 1997 1996 1995
EBIT $(1,097) $(975) $(392)
EBITDA $ (917) $(888) $(283)
Capital Expenditures $ 308 $ 245 $ 159
Other initiatives include AT&T Solutions, AT&T WorldNet and other online
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
services, and international markets (excluding bilateral traffic). AT&T
Solutions continued to grow and made progress in 1997 toward achieving
profitability. We expect AT&T Solutions to turn profitable in 1998. In 1997 AT&T
Solutions won contracts with such companies as 1-800-FLOWERS, Bear Stearns,
Hallmark, Royal Bank of Canada, Chung Hwa Telecommunications, PT Telkom, Norwest
Bank, Best Buy and United Airlines. EBIT dilution from AT&T Solutions decreased
53% in 1997 and increased 4% in 1996.
In 1997 we continued to develop our presence in the Internet access and
electronic commerce businesses through our online services such as AT&T WorldNet
and electronic commerce businesses. AT&T WorldNet signed up its one-millionth
customer in the fourth quarter of 1997 and finished the year with 1.01 million
Internet access customers. This represents an increase of 443,000 subscribers
for the year. As AT&T WorldNet's initial promotional activity began to expire in
1997, subscriber growth slowed as many customers who were receiving the free
promotion deactivated service. We continue to explore ways of growing the
Internet access business and realizing synergies between it and other AT&T
businesses. For example, in January 1998 we announced a long-distance offer
targeting Internet access customers. Beginning in March 1998 AT&T WorldNet
customers can sign up for long-distance services via AT&T's Web site and receive
a rate of nine cents per minute.
Globally, we focused our strategy on serving multinational corporations and
global travelers and expanding our North American franchise in Canada and
Mexico. However, equity losses from Alestra, our Mexican joint venture with
Grupo Alfa and VISA-Bancomer, exceeded our expectations in 1997.
AT&T and British Telecommunications PLC (BT) announced on July 26, 1998 that
they will create a global venture to serve the complete communications needs of
multinational companies and the international calling needs of individuals and
businesses around the world. The venture, which will be owned equally by AT&T
and BT, will combine trans-border assets and operations of each company,
including their existing international networks, all of their international
traffic, all of their trans-border products for business customers -- including
an expanding set of Concert services -- and AT&T and BT's multinational accounts
in selected industry sectors. The formation of the venture is subject to certain
conditions, including receipt of regulatory approvals and the purchase by BT of
MCI Communication Corporation's interest in Concert and the final negotiation
and execution of definitive documents. The transaction is expected to be
completed within 12 months. Based on the merger agreement, AT&T may be required
to exit certain operations which compete directly with BT. A full review is
currently underway to determine the size and scope of any international
restructurings. Management expects to have definitive plans in place by the end
of 1998, and accordingly, a restructuring charge associated with this review
will be forthcoming.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
CASH FLOWS
Dollars in Millions
EBITDA
For the Years Ended December 31 1997 1996 1995
Total AT&T* $11,327 $11,995 $11,135
Wireless services $1,227 $1,348 $986
*Excludes restructuring and other charges of $3,023 in 1995
EBITDA is a measure of our ability to generate cash flow and should be
considered in addition to, but not as a substitute for, other measures of
financial performance reported in accordance with generally accepted accounting
principles. The decrease of $668 million, or 5.6%, in 1997 was due primarily to
an increase in network and other communications services expenses partially
offset by increased revenues. The 1996 increase of $860 million, or 7.7%, was
primarily due to an increase in revenues and a decrease in access and other
interconnection expenses partially offset by increases in both SG&A expenses and
network and other communications services expenses.
Wireless services EBITDA in 1997 contained an $80 million charge to exit the
two-way messaging business and also reflected increased dilution from
initiatives. EBITDA for wireless services for 1996 contained a gain on the
exchange of several wireless properties.
All cash flow discussions pertain to cash flows from continuing operations.
Dollars in Millions
For the Years Ended December 31 1997 1996 1995
Cash flows from operating activities $8,501 $8,087 $8,229
Cash flow from operations increased $414 million, or 5.1%, in 1997 and decreased
$142 million, or 1.7%, in 1996. A number of factors drove the increase in 1997
including the collection of employee-benefit-related receivables from Lucent in
1997 and improved customer cash collections across the company. In addition,
1996 cash flow from operations included a $300 million net prepayment to Lucent.
The decrease in 1996 related mainly to required cash payments for
restructuring and other charges amounting to $471 million.
Dollars in Millions
For the Years Ended December 31 1997 1996 1995
Cash flows used in
investing activities $(6,755) $(2,088) $(8,363)
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
Included in 1997 investing activities were net capital expenditures, the net
funding requirements for UCS, acquisitions of licenses and proceeds received
from divestments. We continued to fund the UCS operations up until its sale in
April, 1998. Our assets, therefore, included short- and long-term notes
receivable from UCS, and our debt included external debt used to fund UCS. In
accordance with the purchase agreement, at the time of sale in 1998 we received
$5,722 million from Citibank for the notes receivable from UCS. Cash used in
investing activities increased significantly in 1997 compared with 1996
primarily as a result of the lower level of credit card receivables securitized
in 1997 by UCS ($1 billion) versus receivables securitized in 1996 ($3 billion).
Due to the significant cash generated from the 1996 securitizations, UCS lowered
its debt requirements and subsequently repaid $3,360 million of its notes
payable to us. In 1997, with reduced securitizations and a growing portfolio,
UCS increased its notes payable to us.
Capital expenditures, acquisitions of marketable securities, investments,
licenses and businesses amounted to $8,149 million in 1997, $8,110 million in
1996 and $10,199 million in 1995. This resulted in net cash outlays for these
categories in 1997, 1996 and 1995 of $8,039 million, $7,854 million and $10,176
million, respectively.
We expect our 1998 capital expenditures to be about $8 billion. These
expenditures include the completion of our three-year program of SONET
deployment as well as additional capital to meet our customers' needs for new
technology and increased capacity in long-distance, wireless, WorldNet and local
services.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
Dollars in Millions
For the Years Ended December 31 1997 1996 1995
Cash flows from
financing activities $(1,540) $(4,295) $1,612
In 1997 we raised substantially all necessary external financing through
issuances of commercial paper. We expect to be able to arrange any necessary
future financing using issuances of commercial paper, long-term debt and equity,
with the timing of issue, principal amount and form depending on our needs and
the prevailing market and economic conditions. We do not anticipate requiring
additional external financing in 1998 to fund capital expenditures and dividend
payments.
During 1997 we retired long-term debt of $737 million and increased short-term
borrowings by $1,114 million. The increase in short-term debt was primarily due
to increased funding requirements of UCS.
In 1996 we retired long-term debt of $1,497 million and decreased short-term
debt by $5,301 million. The changes in debt reflected the use of alternative
sources of funding, such as securitization, as well as Lucent's use of its own
external financing in 1996. Additionally, the cash collection of the $2.0
billion in accounts receivable retained by AT&T continuing operations as part of
the 1995 restructuring plan and the proceeds of $1.8 billion from the sale of
AT&T Capital were used to pay down our debt. During 1995 we retired $2,143
million of long-term debt, but borrowed an additional $2,551 million of
long-term debt and $1,978 million of short-term debt.
In 1997 we obtained substantially all of the stock for our shareowner and
employee benefit stock-ownership plans in the open market rather than issuing
new shares. This required us to use the cash received from shareowners and
employees to purchase the shares. In 1996 and 1995 the stock used in our
shareowner and employee benefit stock-ownership plans was issued from unissued
or treasury shares. Accordingly, during those years we kept the more than $1.2
billion of cash received from shareowners and employees for the issuances of
shares. We paid dividends of $2,142 million in 1997, $2,122 million in 1996 and
$2,088 million in 1995. As we issue shares in 1998, as in
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
connection with the TCG merger and TCI acquisition, dividend payments will
increase, assuming that the company's dividend policy remains the same. To
support future needs, the proposal to increase the number of authorized shares
from 2 billion to 6 billion was approved at the annual shareholders' meeting in
May 1998.
In July 1998, AT&T's Board of Directors authorized an open market share
repurchase program to repurchase up to $3 billion of AT&T common stock. We began
repurchasing shares in the third quarter of 1998 and intend to reissue the
repurchased shares as part of the shares to be issued in connection with the TCI
merger.
In August 1998, AT&T extinguished approximately $1 billion of debt. The early
extinguishment of this debt resulted in a pre-tax charge to AT&T of $217 million
($137 million after-tax) and was recorded as an extraordinary loss.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
RISK MANAGEMENT
We are exposed to market risk from changes in interest and foreign exchange
rates. On a limited basis we use certain derivative financial instruments
including interest rate swaps, options, forwards and other derivative contracts
to manage these risks. We do not use financial instruments for trading or
speculative purposes. All financial instruments are used in accordance with
board-approved policies.
We use interest rate swaps to manage the impact of interest rate changes on
earnings and cash flows and also to lower our overall borrowing costs. We
monitor our interest rate risk on the basis of changes in fair value. Assuming a
10% downward shift in interest rates at December 31, 1997, the potential loss in
the net change in the fair value of interest rate swaps and the underlying
hedged debt would have been $3 million. Assuming a 10% downward shift in
interest rates at December 31, 1997, the potential loss in the net change in
fair value of unhedged debt would have been $346 million.
We use forward and option contracts to reduce our exposure to the risk of
adverse changes in currency exchange rates. We are subject to foreign exchange
risk related to reimbursements to foreign telephone companies for their portion
of the revenues billed by AT&T for calls placed in the U.S. to a foreign
country. In addition, we are also subject to foreign exchange risk related to
other foreign-currency-denominated transactions. As of December 31, 1997, there
was a net unrealized loss on forward contracts of $30 million, calculated based
on the difference between the contract rate and the rate available to terminate
the contracts. We monitor our foreign exchange rate risk on the
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
basis of changes in fair value. Additional potential losses in the net fair
value of these contracts, assuming a 10% appreciation in the U.S. dollar at
December 31, 1997, would have been $6 million. Because these contacts are
entered into for hedging purposes, we believe that these losses would be largely
offset by gains on the underlying firmly committed or anticipated transactions.
The estimated potential losses, as discussed above, assume the occurrence of
certain adverse market conditions. They do not consider the potential effect of
favorable changes in market factors and do not represent projected losses in
fair value that we expect to incur. Future impacts would be based on actual
developments in global financial markets. Our management does not foresee any
significant changes in the strategies used to manage interest rate risk or
foreign currency rate risk in the near future.
FINANCIAL CONDITION
Dollars in Millions
At December 31 1997 1996
Total assets $61,095 $57,348
Total assets from continuing operations $59,994 $55,838
Total assets from continuing operations increased $4,156 million, or 7.4%, in
1997 primarily due to increases in property, plant and equipment, long-term
receivables and other assets, partially offset by decreases in other receivables
and accounts receivable. The increase in property, plant and equipment resulted
from investments in the network. The increase in other assets is driven by an
increase in deferred charges as well as goodwill associated with the
acquisitions of several local businesses, while both the increase in long-term
receivables and the decrease in other receivables are related to notes
receivable from UCS. As a result of UCS becoming a discontinued operation, our
balance sheet for continuing operations reflected the receivable from UCS that
was paid by Citibank as well as the external debt associated with procuring debt
on behalf of UCS. In total, the receivable from UCS increased $441 million. The
decrease in accounts receivable was primarily a result of our lower
fourth-quarter consumer long-distance revenue.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
Dollars in Millions
At December 31 1997 1996
Total liabilities $37,417 $36,256
Total liabilities increased $1,161 million, or 3.2%, in 1997 primarily as a
result of increases in both deferred income taxes and total outstanding debt.
The increase in deferred income taxes was mainly a result of the difference in
book and tax basis for our property, plant and equipment, while debt increased
due to increased funding requirements for UCS.
Dollars in Millions
At December 31 1997 1996
Total shareowners' equity $23,678 $21,092
Shareowners' equity increased $2,586 million, or 12.3%, in 1997. The increase
was driven by net income, partially offset by 1997 dividends.
At December 31 1997 1996
Debt ratio 33.5% 35.0%
Our debt ratio declined slightly in 1997 due to the increase in shareowners'
equity as discussed above. In 1998 we expect our debt ratio to decrease further
as we utilize expected cash proceeds from asset dispositions to retire a certain
amount of outstanding debt as well as to extinguish approximately $1 billion of
debt in August 1998.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
SUBSEQUENT EVENTS
On June 24, 1998, AT&T signed a definitive merger agreement with TCI for an
all-stock transaction. Under the agreement, AT&T will issue 0.7757 shares of
AT&T common stock for each share of TCI Group Series A common stock and 0.8533
shares of AT&T common stock for each share of TCI Group Series B stock. The
transaction, which is subject to regulatory, shareowner and other approvals, is
expected to be completed in the first half of 1999. Also announced was TCI's
intention to combine Liberty Media Group, its programming arm, and TCI Ventures
Group, its technology investments unit, to form the new Liberty Media Group.
Upon closing of the AT&T/TCI merger, the shareowners of the new Liberty Media
Group will be issued separate tracking stock by AT&T in exchange for the shares
currently held in Liberty Media Group and TCI Ventures Group.
AT&T and British Telecommunications PLC (BT) announced on July 26, 1998 that
they will create a global venture to serve the complete communications needs of
multinational companies and the international calling needs of individuals and
businesses around the world. The venture, which will be owned equally by AT&T
and BT, will combine trans-border assets and operations of each company,
including their existing international networks, all of their international
traffic, all of their trans-border products for business customers -- including
an expanding set of Concert services -- and AT&T and BT's multinational accounts
in selected industry sectors. The formation of the venture is subject to certain
conditions, including receipt of regulatory approvals and the purchase by BT of
MCI Communication Corporation's interest in Concert and the final negotiation
and execution of definitive documents.
The transaction is expected to be completed within 12 months.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
RECENT PRONOUNCEMENTS
Beginning with the 1998 annual report we will adopt 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 revenues or
holds assets, and major customers.
In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 132, "Employers' Disclosure about Pensions and Other Postretirement
Benefits." Among other provisions, it standardizes certain disclosure
requirements for pension and other postretirement benefits, requires additional
information on changes in the benefit obligations and fair values of plan
assets, and eliminates certain other disclosures. The standard is effective for
fiscal years beginning after December 15, 1997. For AT&T this means that the
standard is effective for the 1998 annual report. Since the standard applies
only to the presentation of pension and other postretirement benefit
information, it will not have any impact on AT&T's results of operations,
financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Among other provisions, the SOP
requires that entities capitalize certain internal-use software costs once
certain criteria are met. The SOP is effective for financial statements for
fiscal years beginning after December 15, 1998, though early adoption is
encouraged. For AT&T this means that it must be adopted no later than January 1,
1999. If AT&T elects to adopt the SOP earlier than the effective date,
restatement of interim periods during the year of adoption is required.
Management is currently assessing the impact on AT&T's consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Among other provisions, it requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Gains and losses resulting from changes in the fair values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. This standard is effective for fiscal years
beginning after June 15, 1999, though earlier adoption is encouraged and
retroactive application is prohibited. For AT&T this means that the standard
must be adopted no later than January 1, 2000. Management does not expect the
adoption of this standard to have a material impact on AT&T's results of
operations, financial position or cash flows.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
FORWARD LOOKING STATEMENTS
Except for the historical statements and discussions contained herein,
statements contained in this report constitute "forward looking statements"
within the meaning of Section 27A of the Securities Exchange Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. 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 our 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, our
ability to achieve a significant market penetration in new markets and the
related costs thereof, and competitive pressures. Shareowners may view our
reports filed with the Securities and Exchange Commission for a more detailed
description of the uncertainties and other factors that could cause actual
results to differ materially from such forward looking statements. We disclaim
any intention or obligation to update or revise forward looking statements,
whether as a result of new information, future events or otherwise.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
<TABLE>
<CAPTION>
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(UNAUDITED)
AT&T Corp. and Subsidiaries
Dollars in millions (except per share amounts)
<S> <C> <C> <C> <C> <C>
1997 1996 1995* 1994 1993*
RESULTS OF OPERATIONS
Revenues $51,577 $50,688 $48,449 $46,063 $43,779
Operating income 6,836 8,709 5,169 7,393 6,556
Income from continuing operations
Before cumulative effects of
accounting changes 4,249 5,458 2,981 4,230 3,768
Income before cumulative
effects of accounting changes 4,415 5,793 85 4,680 3,684
Net income(loss) 4,415 5,793 85 4,680 (5,924)
Earnings per common share-basic:
Income from continuing
operations before cumulative
effects of accounting changes 2.39 3.10 1.72 2.48 2.23
Income before cumulative
effects of accounting changes 2.48 3.29 0.05 2.74 2.18
Net income(loss) 2.48 3.29 0.05 2.74 (3.51)
Earnings per common share-diluted:
Income from continuing
operations before cumulative
effects of accounting changes 2.38 3.09 1.71 2.47 2.22
Income before cumulative
effects of accounting changes 2.47 3.28 0.05 2.73 2.17
Net income(loss) 2.47 3.28 0.05 2.73 (3.49)
Dividends declared per
common share 1.32 1.32 1.32 1.32 1.32
</TABLE>
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
<TABLE>
<CAPTION>
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(UNAUDITED)
AT&T Corp. and Subsidiaries
Dollars in millions (except per share amounts)
<S> <C> <C> <C> <C> <C>
1997 1996 1995* 1994 1993*
ASSETS AND CAPITAL
Property, plant and
equipment-net $24,203 $20,803 $16,453 $14,721 $13,913
Total assets-
continuing operations 59,994 55,838 54,365 47,926 41,718
Total assets 61,095 57,348 62,864 57,817 50,388
Long-term debt 7,857 8,878 8,913 9,138 10,317
Total debt 11,942 11,351 21,081 18,720 18,251
Shareowners' equity 23,678 21,092 17,400 18,100 13,583
Gross capital expenditures 7,714 7,084 4,659 3,504 2,692
Employees-continuing
Operations 130,800 128,700 126,100 116,400 118,800
OTHER INFORMATION
Operating income as a
percentage of revenues 13.3% 17.2% 10.7% 16.1% 15.1%
Income from continuing
operations as a percentage
of revenues 8.2% 10.8% 6.2% 9.2% 8.7%
Return on average common
Equity 19.7% 27.1% 0.4% 29.5% (49.1)%
Data at year-end:
Stock price per share** $61.31 $41.31 $44.40 $34.46 $36.00
Book value per
Common share $13.24 $11.89 $9.97 $10.53 $8.01
Debt ratio 33.5% 35.0% 54.8% 50.8% 57.3%
<FN>
* 1995 continuing operations data reflect $3.0 billion of pretax business
restructuring and other charges. 1993 net income reflects a $9.6 billion
net charge for three accounting changes.
** Stock prices for 1993-1996 have been restated to reflect the spin-offs of
Lucent and NCR.
</FN>
</TABLE>
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
CONSOLIDATED STATEMENTS OF INCOME AT&T CORP. AND SUBSIDIARIES
For the Years Ended December 31
Dollars in millions (except per share amounts) 1997 1996 1995
Revenues................................... $51,577 $50,688 $48,449
Operating Expenses
Access and other interconnection........... 16,350 16,363 17,647
Network and other communications services.. 9,412 8,063 6,913
Depreciation and amortization.............. 3,982 2,819 2,623
Selling, general and administrative........ 14,997 14,734 13,074
Restructuring and other charges ........... - - 3,023
Total operating expenses................... 44,741 41,979 43,280
Operating income........................... 6,836 8,709 5,169
Other income-net........................... 443 405 270
Interest expense........................... 307 417 514
Income from continuing operations before
income taxes............................. 6,972 8,697 4,925
Provision for income taxes................. 2,723 3,239 1,944
Income from continuing operations.......... 4,249 5,458 2,981
Discontinued Operations
Income(loss) from discontinued operations
(net of taxes of $50 in 1997, $(353)
in 1996 and $(1,147) in 1995)............ 100 173 (2,896)
Gain on sale of discontinued operations
(net of taxes of $43 in 1997 and
$138 in 1996)............................ 66 162 -
Net income ................................ $ 4,415 $ 5,793 $ 85
Weighted-average common shares and
potential common shares (millions)*...... 1,789 1,767 1,741
Per Common Share-Basic:
Income from continuing operations.......... $ 2.39 $ 3.10 $ 1.72
Income(loss) from discontinued operations.. 0.05 0.10 (1.67)
Gain on sale of discontinued operations.... 0.04 0.09 -
Net income................................. $ 2.48 $ 3.29 $ 0.05
Per Common Share-Diluted:
Income from continuing operations.......... $ 2.38 $ 3.09 $ 1.71
Income(loss) from discontinued operations.. 0.05 0.10 (1.66)
Gain on sale of discontinued operations.... 0.04 0.09 -
Net income................................. $ 2.47 $ 3.28 $ 0.05
* Amounts represent the weighted-average shares assuming dilution from the
potential exercise of outstanding stock options. Amounts are reduced by
8 million, 7 million and 7 million shares for 1997, 1996 and 1995,
respectively, assuming no dilution.
The notes are an integral part of the consolidated financial statements.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
CONSOLIDATED BALANCE SHEETS AT&T CORP. AND SUBSIDIARIES
At December 31
Dollars in millions 1997 1996
ASSETS
Cash and cash equivalents $ 318 $ 196
Marketable securities 307 441
Receivables, less allowances of $988 and $948
Accounts receivable 8,675 9,024
Other receivables 5,684 6,141
Deferred income taxes 1,252 1,265
Other current assets 541 708
TOTAL CURRENT ASSETS 16,777 17,775
Property, plant and equipment-net 24,203 20,803
Licensing costs, net of accumulated
amortization of $1,076 and $913 8,368 8,071
Investments 3,866 4,001
Long-term receivables 1,794 873
Prepaid pension costs 2,156 1,933
Other assets 2,830 2,382
Net assets of discontinued operations 1,101 1,510
TOTAL ASSETS $61,095 $57,348
LIABILITIES
Accounts payable $ 6,402 $ 6,207
Payroll and benefit-related liabilities 2,390 2,641
Debt maturing within one year 4,085 2,473
Dividends payable 538 536
Other current liabilities 3,902 4,456
TOTAL CURRENT LIABILITIES 17,317 16,313
Long-term debt 7,857 8,878
Long-term benefit-related liabilities 3,142 3,037
Deferred income taxes 5,711 4,827
Other long-term liabilities and
deferred credits 3,390 3,201
TOTAL LIABILITIES 37,417 36,256
SHAREOWNERS' EQUITY
Common shares, par value $1 per share 1,789 1,774
Authorized shares: 2,000,000,000
Outstanding shares: 1,789,013,000 at December 31, 1997;
1,774,314,000 at December 31, 1996
Additional paid-in capital 17,121 16,624
Guaranteed ESOP obligation (70) (96)
Retained Earnings 4,876 2,790
Accumulated Other Comprehensive Income (38) -
TOTAL SHAREOWNERS' EQUITY 23,678 21,092
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $61,095 $57,348
The notes are an integral part of the consolidated financial statements.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
AT&T CORP. AND SUBSIDIARIES
For the Years Ended December 31
Dollars in millions 1997 1996 1995
Common Shares
Balance at beginning of year $ 1,774 $ 1,746 $ 1,719
Shares issued, net:
Under employee plans 2 20 13
Under shareowner plans - 8 13
For acquisitions 6 - -
Other 7 - 1
Balance at end of year 1,789 1,774 1,746
Additional Paid-In Capital
Balance at beginning of year 16,624 16,656 15,887
Shares issued(acquired), net:
Under employee plans (8) 975 598
Under shareowner plans 9 434 687
For acquisitions 117 23 -
Other 379 286 11
Dividends declared - - (527)
Spin-offs of Lucent and NCR - (2,326) -
Debt conversion - 264 -
Reorganization - 312 -
Balance at end of year 17,121 16,624 16,656
Guaranteed ESOP Obligation
Balance at beginning of year (96) (254) (305)
Amortization 26 52 51
Assumption by Lucent - 106 -
Balance at end of year (70) (96) (254)
Retained Earnings (Deficit)
Balance at beginning of year 2,790 (773) 704
Net income 4,415 $4,415 5,793 $5,793 85 $85
Dividends declared (2,145) (2,132) (1,570)
Treasury shares issued at less
than cost (187) - -
Reorganization - (101) -
Other changes 3 3 8
Balance at end of year 4,876 2,790 (773)
Accumulated Comprehensive Income
Balance at beginning of year - 25 95
Other Comprehensive Income
(net of taxes of $(24),$42,$72) (38) (38) (25) (25) (70)(70)
Total comprehensive income $4,377 $5,768 $15
Balance at end of year (38) - 25
Total Shareowners' Equity $23,678 $21,092 $17,400
In March 1990 we issued 13.4 million new shares of common stock in connection
with the establishment of an ESOP feature for the nonmanagement savings plan.
The shares are being allocated to plan participants over ten years commencing in
July 1990 as contributions are made to the plan.
We have 100 million authorized shares of preferred stock at $1 par value. No
preferred stock is currently issued or outstanding.
The notes are an integral part of the consolidated financial statements.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
CONSOLIDATED STATEMENTS OF CASH FLOWS AT&T CORP. AND SUBSIDIARIES
For the Years Ended December 31
Dollars in millions 1997 1996 1995
OPERATING ACTIVITIES
Net income $ 4,415 $ 5,793 $ 85
Add:(Income)loss from discontinued operations (100) (173) 2,896
Gain on sale of discontinued operations (66) (162) -
Income from continuing operations 4,249 5,458 2,981
Adjustments to reconcile net income to net
cash provided by operating activities of
continuing operations:
Gains on sales (134) (158) (64)
Restructuring and other charges - - 3,023
Depreciation and amortization 3,982 2,819 2,623
Provision for uncollectibles 1,522 1,518 1,125
Increase in accounts receivable (1,034) (1,731) (1,766)
Increase in accounts payable 125 679 908
Net increase in other operating
assets and liabilities (832) (1,064) (63)
Other adjustments for noncash items-net 623 566 (538)
NET CASH PROVIDED BY OPERATING ACTIVITIES
OF CONTINUING OPERATIONS 8,501 8,087 8,229
INVESTING ACTIVITIES
Capital expenditures (7,604) (6,828) (4,736)
Proceeds from sale or disposal of property,
plant and equipment 169 145 204
(Increase)decrease in finance assets (465) 3,499 1,845
Acquisitions of licenses (435) (267) (1,978)
Net increase(decrease) in marketable securities 134 (441) -
Net decrease(increase) in investments 99 (318) (56)
Dispositions(acquisitions), net of
cash acquired 1,507 2,145 (3,406)
Other investing activities-net (160) (23) (236)
NET CASH USED IN INVESTING ACTIVITIES OF
CONTINUING OPERATIONS (6,755) (2,088) (8,363)
FINANCING ACTIVITIES
Proceeds from long-term debt issuances - 1,060 2,551
Retirements of long-term debt (737) (1,497) (2,143)
Issuance of common shares-net 171 1,580 1,214
Dividends paid (2,142) (2,122) (2,088)
Increase(decrease) in short-term
borrowings-net 1,114 (5,301) 1,978
Other financing activities-net 54 1,985 100
NET CASH (USED IN)PROVIDED BY FINANCING
ACTIVITIES OF CONTINUING OPERATIONS (1,540) (4,295) 1,612
Net cash used in discontinued operations (84) (1,595) (1,544)
Net increase(decrease) in cash and cash
equivalents 122 109 (66)
Cash and cash equivalents at beginning
of year 196 87 153
Cash and cash equivalents at end of year $ 318 $ 196 $ 87
The notes are an integral part of the consolidated financial statements.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT&T CORP. AND SUBSIDIARIES (AT&T)
(Dollars in millions unless otherwise noted, except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include all majority-owned subsidiaries.
Investments in which we exercise significant influence but which we do not
control (generally a 20% - 50% ownership interest) are accounted for under the
equity method of accounting. This represents the majority of our investments.
Generally, investments in which we have less than a 20% ownership interest are
accounted for under the cost method of accounting.
CURRENCY TRANSLATION
For operations outside of the U.S. that prepare financial statements in
currencies other than the U.S. dollar, we translate income statement amounts at
average exchange rates for the year and we translate assets and liabilities at
year-end exchange rates. We present these translation adjustments as a separate
component of shareowners' equity.
REVENUE RECOGNITION
We recognize wireline and wireless services revenue based upon minutes of
traffic processed and contracted fees. Generally, we recognize products and
other services revenue in accordance with contract terms.
ADVERTISING AND PROMOTIONAL COSTS
We expense costs of advertising and promotions, including checks used to acquire
customers, as incurred. Advertising and promotional expenses were $1,995, $2,533
and $2,150 in 1997, 1996 and 1995, respectively.
INVESTMENT TAX CREDITS
We amortize investment tax credits as a reduction to the provision for income
taxes over the useful lives of the property that produced the credits.
EARNINGS PER SHARE
We calculate earnings per share in accordance with Statement of Financial
Accounting Standard (SFAS) No. 128, "Earnings Per Share." We use the
weighted-average number of common shares outstanding during each period to
compute basic earnings per common share. Diluted earnings per share is computed
using the weighted-average number of common shares and dilutive potential common
shares outstanding. Dilutive potential common shares are additional common
shares assumed to be exercised.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
CASH EQUIVALENTS
We consider all highly liquid investments with original maturities of generally
three months or less to be cash equivalents.
MARKETABLE SECURITITES
Marketable securities consist principally of fixed income securities, U.S.
Treasury Bills, commercial paper, floating rate notes, federal agency notes,
federal agency discount notes, corporate medium-term notes, corporate notes,
bank notes and certificates of deposit with original maturity dates greater than
three months. The carrying value of these securities approximates market value.
Market value is determined by the most recently traded price of the security at
the balance sheet date. All marketable securities are classified as available
for sale securities under the provisions of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Unrealized holding gains and
losses are determined on the specific identification method.
PROPERTY, PLANT AND EQUIPMENT
We state property, plant and equipment at cost, unless impaired, and determine
depreciation based upon the assets' estimated useful lives using either the
group or unit method. The group method is used for most depreciable assets. When
we sell or retire assets that were depreciated using the group method, we deduct
the cost from property, plant and equipment and accumulated depreciation. The
unit method is used primarily for large computer systems and support assets.
When we sell assets that were depreciated using the unit method, we include the
related gains or losses in operating results.
We use accelerated depreciation methods primarily for digital equipment used
in the telecommunications network, except for switching equipment placed in
service before 1989 and certain high technology computer processing equipment.
All other plant and equipment, including capitalized software, is depreciated on
a straight-line basis.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the fair
value and carrying value of the asset.
LICENSING COSTS
Licensing costs are costs incurred to develop or acquire cellular, personal
communications services (PCS) and messaging licenses. Generally, amortization
begins with the commencement of service to customers and is computed using the
straight-line method over a period of 40 years.
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net assets
acquired in business combinations accounted for as purchases. We amortize
goodwill on a straight-line basis over the periods benefited ranging from five
to 40 years. Goodwill is reviewed for impairment annually or whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows is less
than the carrying amount, a loss is recognized for the difference between the
fair value and carrying value of the asset.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
DERIVATIVE FINANCIAL INSTRUMENTS
We use various financial instruments, including derivative financial
instruments, for purposes other than trading. We do not use derivative financial
instruments for speculative purposes. Derivatives, used as part of our risk
management strategy, must be designated at inception as a hedge and measured for
effectiveness both at inception and on an ongoing basis. Gains and losses
related to qualifying hedges of foreign currency firm commitments are deferred
in other assets or liabilities and recognized as part of the underlying
transactions as they occur. All other foreign exchange contracts are marked to
market on a current basis and the respective gains or losses are recognized in
other income-net. Interest rate differentials associated with interest rate
swaps used to hedge AT&T's debt obligations are recorded as an adjustment to
interest payable or receivable with the offset to interest expense over the life
of the swaps. If we terminate an interest rate swap agreement, the gain or loss
is recorded as an adjustment to the basis of the underlying asset or liability
and amortized over the remaining life. Cash flows from financial instruments are
classified in the Consolidated Statements of Cash Flows under the same
categories as the cash flows from the related assets, liabilities or anticipated
transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
revenues and expenses during the period reported. Actual results could differ
from those estimates. Estimates are used when accounting for certain items such
as long-term contracts, allowance for doubtful accounts, depreciation and
amortization, employee benefit plans, taxes, restructuring reserves and
contingencies.
CONCENTRATIONS
As of December 31, 1997, we do not have any significant concentration of
business transacted with a particular customer, supplier or lender that could,
if suddenly eliminated, severely impact our operations. We also do not have a
concentration of available sources of labor, services, or licenses or other
rights that could, if suddenly eliminated, severely impact our operations.
RECLASSIFICATIONS
We reclassified certain amounts for previous years to conform with the 1998
presentation.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
2. DISCONTINUED OPERATIONS
On September 20, 1995, AT&T announced a plan, subject to certain conditions, to
separate into three independent, publicly held, global companies: communications
services (AT&T), communications systems and technologies (Lucent Technologies
Inc., "Lucent") and transaction-intensive computing (NCR Corporation, "NCR"). In
April 1996 Lucent sold 112 million shares of common stock in an initial public
offering (IPO), representing 17.6% of the Lucent common stock outstanding.
Because of AT&T's plan to spin off its remaining 82.4% interest in Lucent, the
sale of the Lucent stock was recorded as an equity transaction, resulting in an
increase in AT&T's additional paid-in capital at the time of the IPO. In
addition, in connection with the restructuring, Lucent assumed $3.7 billion of
AT&T debt in 1996. On September 30, 1996, AT&T distributed to AT&T shareowners
of record as of September 17, 1996, the remaining Lucent common stock held by
AT&T. The shares were distributed on the basis of .324084 of a share of Lucent
for each AT&T share outstanding.
On October 1, 1996, AT&T sold its remaining interest in AT&T Capital for
approximately $1.8 billion, resulting in a gain of $162, or $.09 per share,
after taxes.
On December 31, 1996, AT&T also distributed all of the outstanding common
stock of NCR to AT&T shareowners of record as of December 13, 1996. The shares
were distributed on the basis of .0625 of a share of NCR for each AT&T share
outstanding on the record date. As a result of the Lucent and NCR distributions,
AT&T's shareowners' equity was reduced by $2.2 billion. The distributions of the
Lucent and NCR common stock to AT&T shareowners were non-cash transactions
totaling $4.8 billion which did not affect AT&T's results of operations.
On July 1, 1997, AT&T sold its submarine systems business (SSI) to Tyco
International Ltd. for approximately $850, resulting in an after-tax gain of
$66, or $0.04 per share.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
On April 2, 1998, AT&T sold AT&T Universal Card Services, Inc. (UCS) for
$3,500 to Citibank. The after-tax gain resulting from the disposal of UCS was
$1,290, or $0.71 per share in the second quarter. Included in the sale was the
signing of a co-branding and joint marketing agreement. In addition, we received
$5,722 as settlement of receivables from UCS.
The consolidated financial statements of AT&T have been restated to reflect
the dispositions of Lucent, NCR, AT&T Capital, SSI, UCS and certain other
businesses as discontinued operations. Accordingly, the revenues, costs and
expenses, assets and liabilities, and cash flows of these discontinued
operations 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 the 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" for all periods presented.
In 1997 we adopted SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." Among other provisions,
this standard requires that in connection with the transfer of financial assets,
liabilities incurred should be measured at fair value and retained interests
should be recorded as a portion of the original carrying amount of the
transferred financial assets. This standard applies only to UCS and resulted in
a substantial benefit to income from discontinued operations for the year.
Summarized financial information for discontinued operations is as follows:
1997 1996 1995
Revenues $1,942 $23,979 $31,164
Income(loss) before
income taxes 150 (180) (4,043)
Net income(loss) 100 173 (2,896)
Current assets 7,734 7,590
Total assets 7,808 7,979
Current liabilities* 5,602 6,190
Total liabilities* 6,707 6,469
Net assets of discontinued
operations $1,101 $ 1,510
*Current liabilities include $5,224 and $5,706 of debt maturing within one year
and total liabilities include an additional $1,093 and $170 of long-term debt
at December 31, 1997, and December 31, 1996, respectively, all of which were
payable to AT&T.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
The income(loss) before income taxes includes allocated interest expense of
$45 and $134 in 1996 and 1995, respectively. Interest expense was allocated to
discontinued operations based on a ratio of net assets of discontinued
operations to total AT&T consolidated assets. No interest expense was allocated
to discontinued operations in 1997 due to the immateriality of the amounts;
however, UCS recorded direct interest expense of $297, $383 and $626 in 1997,
1996 and 1995, respectively, primarily related to the amounts payable to AT&T.
3. NEW ACCOUNTING PRONOUNCEMENTS
Beginning with the 1998 annual report we will adopt 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. This 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.
In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 132, "Employers' Disclosure about Pensions and Other Postretirement
Benefits." Among other provisions, it standardizes certain disclosure
requirements for pension and other postretirement benefits, requires additional
information on changes in the benefit obligations and fair values of plan
assets, and eliminates certain other disclosures. The standard is effective for
fiscal years beginning after December 15, 1997. For AT&T this means that the
standard is effective for the 1998 annual report. Since the standard applies
only to the presentation of pension and other postretirement benefit
information, it will not have any impact on AT&T's results of operations,
financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Among other provisions, the SOP
requires that entities capitalize certain internal-use software costs once
certain criteria are met. The SOP is effective for financial statements for
fiscal years beginning after December 15, 1998, though early adoption is
encouraged. For AT&T this means that it must be adopted no later than January 1,
1999. If AT&T elects to adopt the SOP earlier than the effective date,
restatement of interim periods during the year of adoption is required.
Management is currently assessing the impact on AT&T's consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Among other provisions, it requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Gains and losses resulting from changes in the fair values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. This standard is effective for fiscal years
beginning after June 15, 1999, though earlier adoption is encouraged and
retroactive application is prohibited. For AT&T this means that the standard
must be adopted no later than January 1, 2000. Management does not expect the
adoption of this standard to have a material impact on AT&T's results of
operations, financial position or cash flows.
4. LIN BROADCASTING
In 1995 we acquired the remaining 48% of LIN Broadcasting Corporation (LIN) for
approximately $3.3 billion. The purchase price was allocated to the fair value
of assets acquired of $4.0 billion and the fair value of liabilities assumed of
$0.7 billion.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
On March 3, 1998, AT&T sold all of its 45% common share interest in LIN
Television Corporation, a subsidiary of LIN, for $742 to Hicks, Muse, Tate and
Furst Incorporated. The company recognized a pre-tax gain of $317 in the first
quarter of 1998. Also on March 3, 1998, AT&T agreed to sell WOOD-TV, its
television station in Grand Rapids, Michigan, for approximately $123, subject to
certain adjustments, which is expected to close in the fourth quarter of 1998.
5. SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION
For the Years Ended December 31 1997 1996 1995
INCLUDED IN DEPRECIATION AND AMORTIZATION
Amortization of licensing costs $163 $170 $133
Amortization of goodwill 62 55 75
INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE
Research and development expenses $851 $822 $727
OTHER INCOME-NET
Interest income $ 59 $ 49 $ 42
Minority interests in earnings
of subsidiaries (12) (12) (16)
Net equity earnings from investments 31 48 84
Officers' life insurance 68 74 73
Sale/exchange of cellular investments 75 158 64
Gain on sale of Skynet 97 - -
Miscellaneous-net 125 88 23
Total other income-net $443 $405 $270
DEDUCTED FROM INTEREST EXPENSE
Capitalized interest $254 $193 $107
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
SUPPLEMENTARY BALANCE SHEET INFORMATION
At December 31 1997 1996
PROPERTY, PLANT AND EQUIPMENT
Machinery, electronic and other equipment $ 39,240 $ 34,017
Buildings and improvements 6,810 6,299
Land and improvements 386 373
Total property, plant and equipment 46,436 40,689
Accumulated depreciation (22,233) (19,886)
Property, plant and equipment-net $ 24,203 $ 20,803
OTHER ASSETS
Unamortized goodwill $ 1,515 $ 1,383
Deferred charges 733 484
Other 582 515
Total other assets $ 2,830 $ 2,382
SUPPLEMENTARY CASH FLOW INFORMATION
For the Years Ended December 31 1997 1996 1995
Interest payments net of
amounts capitalized $ 250 $ 372 $ 445
Income tax payments 2,416 2,136 2,016
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
6. BUSINESS RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1995 we recorded a pre-tax charge of $3,023 to cover
restructuring costs of $2,301 and asset impairments and other charges of $722.
This charge included plans to exit certain proprietary network and messaging
services; restructure customer service organizations; consolidate call servicing
centers; exit certain satellite services; reorganize corporate support functions
such as information systems, human resources and financial operations, and
restructure certain international operations.
As part of our plan to sell certain businesses and to restructure our
operations, restructuring liabilities of $1,712 were recorded for employee
separation costs, costs associated with early termination of building leases and
other items. In addition, asset impairments of $567 (which directly reduced the
carrying value of the related asset balances) and $22 of benefit plan losses
were recorded.
The 1995 restructure charge of $2,301 included separation costs for nearly
17,000 employees, which included approximately 12,000 management and 5,000
occupational employees. As of December 31, 1997, approximately 6,800 management
employees and 2,300 occupational employees have been separated. Of the 6,800
management separations, approximately 4,300 accepted voluntary severance
packages.
During 1996 and 1997 we completed the restructuring of our proprietary network
and messaging services business, closed several call servicing centers,
consolidated customer care centers, sold certain international operations and
reorganized certain corporate support functions. The implementation of certain
restructuring activities are occurring at a slower pace than planned. There have
been delays in exiting certain businesses and reorganizing corporate support
functions, in part to ensure customer satisfaction during this transition
period. However, certain facility costs have payment terms extending beyond
1998. We believe that the balance is adequate to complete these plans.
On January 26, 1998, we announced a plan to reduce headcount by 15,000 to
18,000 over two years as part of the Company's overall cost reduction program.
In connection with this plan, a voluntary retirement incentive program (VRIP)
was offered to eligible management employees. Approximately 15,300 management
employees accepted the VRIP offer. During the second quarter 1998 AT&T recorded
restructuring charges of $2,743 ($1,694 after-tax) primarily in connection with
the VRIP offer. The restructuring charges of $2,743 will be partially offset by
approximately $1.1 billion of gains to be recognized in the third and fourth
quarters of 1998 as employees' pension benefit obligations are settled. The
amount of gains to be recognized in future periods is subject to market
fluctuations. Due to the capital market downturn and the lowering of the
discount rate, as of the beginning of October, we estimate that the gains will
be $0.7 billion.
The following table displays a rollforward of the liabilities for business
restructuring from December 31, 1995, to December 31, 1997:
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
1996
--------------------------
Dec. 31, Dec. 31,
1995 Amounts 1996
Type of Cost Balance Additions Utilized Balance
Employee
separations $ 925 $ - $(319) $ 606
Facility closings 761 - (233) 528
Other 406 - (152) 254
Total $2,092 $ - $(704) $1,388
- ---------------------------------------------------------------------------
1997
--------------------------
Dec. 31, Dec. 31,
1996 Amounts 1997
Type of Cost Balance Additions Utilized Balance
Employee
separations $ 606 $ - $(193) $413
Facility closings 528 - (94) 434
Other 254 - (194) 60
Total $1,388 $ - $(481) $907
- ---------------------------------------------------------------------------
1997 utilization includes $100 reversal of pre-1995 reserves. 1996 utilization
includes $112 of net transfers to Lucent and NCR.
The balance at December 31, 1997, includes $180 of pre-1995 charges primarily
related to excess space in various leased facilities and is expected to be fully
utilized over the remaining terms of the leases.
The 1995 charge of $722 for asset impairments and other charges included $668
for writing down certain impaired assets, including the write-down in the value
of some unnecessary network facilities, the write-down of non-strategic wireless
assets and the reduction in value of some investments. There were no assets to
be disposed of or sold included in these write-downs. The charge also included
$54 of other items, none of which individually exceed 1% of the total charge.
The total pretax charge of $3,023 reduced income from continuing operations by
$2,032, or diluted earnings per share by $1.17 in 1995.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
In addition, charges of $1,172 (net of taxes) in the third quarter of 1995 and
$2,149 (net of taxes) in the fourth quarter of 1995 are reflected in the loss
from discontinued operations. These charges reduced income from discontinued
operations by a total of $3,321, or diluted earnings per share by $1.91 in 1995.
7. INCOME TAXES
The following table shows the principal reasons for the difference between the
effective income tax rate and the United States federal statutory income tax
rate:
For the Years Ended December 31 1997 1996 1995
U.S. federal statutory income tax rate 35% 35% 35%
Federal income tax at statutory rate $2,440 $3,044 $1,724
Amortization of investment tax credits (14) (21) (35)
State and local income taxes, net of
federal income tax effect 183 273 179
Amortization of intangibles 23 14 62
Foreign rate differential 117 131 (11)
Taxes on repatriated and accumulated
foreign income, net of tax credits (32) 19 17
Legal entity restructuring - (195) -
Research credits (63) (13) (24)
Other differences-net 69 (13) 32
Provision for income taxes $2,723 $3,239 $1,944
Effective income tax rate 39.0% 37.2% 39.5%
The U.S. and foreign components of income before income taxes and the
provision for income taxes are presented in this table:
For the Years Ended December 31 1997 1996 1995
INCOME BEFORE INCOME TAXES
United States $7,090 $8,900 $5,412
Foreign (118) (203) (487)
Total $6,972 $8,697 $4,925
PROVISION FOR INCOME TAXES
CURRENT
Federal $1,561 $2,290 $1,922
State and local 194 400 385
Foreign 49 25 1
$1,804 $2,715 $2,308
DEFERRED
Federal $ 851 $ 511 $ (221)
State and local 89 23 (109)
Foreign (5) 11 1
$ 935 $ 545 $ (329)
Deferred investment tax credits (16) (21) (35)
Provision for income taxes $2,723 $3,239 $1,944
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
Deferred income tax liabilities are taxes we expect to pay in future periods.
Similarly, deferred income tax assets are recorded for expected reductions in
taxes payable in future periods. Deferred income taxes arise because of
differences in the book and tax bases of certain assets and liabilities.
Deferred income tax liabilities and assets consist of the following:
At December 31 1997 1996
LONG-TERM DEFERRED INCOME TAX LIABILITIES
Property, plant and equipment $6,285 $5,350
Investments 320 95
Other 1,185 1,404
Total long-term deferred income tax liabilities $7,790 $6,849
LONG-TERM DEFERRED INCOME TAX ASSETS
Business restructuring $ 162 $ 195
Net operating loss/credit carryforwards 487 311
Employee pensions and other benefits-net 1,026 1,298
Reserves and allowances 93 120
Other 658 309
Valuation allowance (347) (211)
Total net long-term deferred income tax assets $2,079 $2,022
Net long-term deferred income tax liabilities $5,711 $4,827
CURRENT DEFERRED INCOME TAX LIABILITIES
Total current deferred income tax liabilities $ 177 $ 119
CURRENT DEFERRED INCOME TAX ASSETS
Business restructuring $ 225 $ 248
Employee pensions and other benefits 315 528
Reserves and allowances 617 587
Other 272 21
Total net current deferred income tax assets $1,429 $1,384
Net current deferred income tax assets $1,252 $1,265
At December 31, 1997, we had net operating loss carryforwards (tax-effected)
for federal and state income tax purposes of $220 and $102, respectively,
expiring through 2013. We also had foreign net operating loss carryforwards
(tax-effected) of $140, of which $130 has no expiration date, with the balance
expiring by the year 2002 as well as federal tax credit carryforwards of $30
which are not subject to expiration. We recorded a valuation allowance to
reflect the estimated amount of deferred tax assets which, more likely than not,
will not be realized.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
8. POSTRETIREMENT BENEFITS
Our benefit plans for retirees include health care benefits, life
insurance coverage and telephone concessions. Postretirement contributions to
trust funds are determined using the attained-age-normal cost method for health
care benefits and the aggregate cost method for life insurance plans.
Immediately following the spin-off of Lucent on September 30, 1996, Lucent
established separate postretirement benefit plans, and a share of the
postretirement benefit obligations and postretirement benefit assets held in
trust were transferred from AT&T to Lucent based on methods and assumptions that
were agreed to by both companies. Adjustments to the estimated assets and
postretirement benefit obligations that were transferred to Lucent were not
material in 1997. Subsequent adjustments, if any, are also expected to be
immaterial.
This table shows the components of the net postretirement benefit cost:
For the Years Ended December 31 1997 1996 1995
Service cost-benefits earned during the period $ 56 $ 53 $ 40
Interest cost on accumulated postretirement
benefit obligation 278 263 258
Expected return on plan assets* (120) (99) (78)
Amortization of unrecognized prior service costs 39 39 23
Amortization of net loss(gain) - 3 (3)
Net postretirement benefit cost $ 253 $259 $240
* The actual return on plan assets was $358 in 1997, $313 in 1996 and $256 in
1995. The expected long-term rate of return on plan assets was 9.0% in 1997,
1996 and 1995.
Prior service costs are amortized primarily on a straight-line basis over the
average remaining service period of active employees. We had approximately
40,400, 37,900 and 34,500 retirees as of December 31, 1997, 1996, and 1995,
respectively.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
Our plan assets consist primarily of listed stocks, corporate and
governmental debt, cash and cash equivalents, and life insurance contracts. The
following table shows the funded status of our postretirement benefit plans
reconciled with the amounts recognized in the Consolidated Balance Sheets:
At December 31 1997 1996
Accumulated postretirement benefit obligation:
Retirees $2,655 $2,244
Fully eligible active plan participants 651 453
Other active plan participants 1,050 1,042
Total accumulated postretirement benefit obligation 4,356 3,739
Plan assets at fair value 1,969 1,566
Unfunded postretirement obligation 2,387 2,173
Less:
Unrecognized prior service costs 166 206
Unrecognized net gain (227) (510)
Accrued postretirement benefit obligation $2,448 $2,477
We made these assumptions in valuing our postretirement benefit obligation at
December 31:
1997 1996
Weighted-average discount rate 7.0% 7.5%
Assumed rate of increase in the per
capita cost of covered health care benefits 5.3% 5.6%
We assumed that the growth in the per capita cost of covered health
care benefits (the health care cost trend rate) would gradually decline after
1997 to 4.8% by the year 2008 and then remain level. This assumption greatly
affects the amounts reported. To illustrate, increasing the assumed trend rate
by 1% in each year would raise our accumulated postretirement benefit obligation
at December 31, 1997, by $218 and our 1997 postretirement benefit costs by $18.
9. EMPLOYEE BENEFIT PLANS
PENSION PLANS
We sponsor noncontributory defined benefit plans covering the majority of our
employees. Benefits for management employees are principally based on
career-average pay. Benefits for occupational employees are not directly related
to pay. Pension contributions are principally determined using the aggregate
cost method and are primarily made to trust funds held for the sole benefit of
plan participants.
Immediately following the spin-off of Lucent on September 30, 1996, Lucent
established separate defined benefit plans, and a share of the pension
obligations and pension assets held in trust were transferred from AT&T to
Lucent based on methods and assumptions that were agreed to by both companies.
Adjustments to the estimated asset and pension obligation amounts that were
transferred to Lucent were not material in 1997. Subsequent adjustments, if any,
are also expected to be immaterial.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
We compute pension cost using the projected unit credit method and assumed a
long-term rate of return on plan assets of 9.0% in 1997, 1996 and 1995.
Pension cost includes the following components:
For the Years Ended December 31 1997 1996 1995
Service cost-benefits earned during
the period $ 305 $ 295 $ 200
Interest cost on projected benefit
obligation 946 861 747
Amortization of unrecognized prior
service costs 114 99 90
Credit for expected return on plan
assets* (1,371) (1,195) (1,043)
Amortization of transition asset (181) (183) (193)
Charges for special pension benefits 5 - 58
Net pension credit $ (182) $ (123) $ (141)
*The actual return on plan assets was $3,464 in 1997, $2,981 in 1996 and $1,044
in 1995.
The net pension credit in 1995 includes a one-time charge of $58 for early
retirement options and curtailments.
This table shows the funded status of the defined benefit plans:
At December 31 1997 1996
Actuarial present value of accumulated
benefit obligation, including vested benefits
of $13,123 and $10,083 $14,150 $11,520
Plan assets at fair value $20,513 $17,680
Less: Actuarial present value of projected
benefit obligation 14,481 12,380
Excess of assets over projected benefit obligation 6,032 5,300
Unrecognized prior service costs 904 766
Unrecognized transition asset (708) (889)
Unrecognized net gain (4,130) (3,303)
Net minimum liability of nonqualified plans (103) (51)
Prepaid pension costs $ 1,995 $ 1,823
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
We used these rates and assumptions to calculate the projected benefit
obligation:
At December 31 1997 1996
Weighted-average discount rate 7.0% 7.5%
Rate of increase in future
compensation levels 4.5% 5.0%
The prepaid pension costs shown above are net of pension liabilities for plans
where accumulated plan benefits exceed assets. Such liabilities, that are not
material, are included in other liabilities in the Consolidated Balance Sheets.
We are amortizing over 15.9 years the unrecognized transition asset related to
our 1986 adoption of SFAS No. 87, "Employers' Accounting for Pensions." We
amortize prior service costs primarily on a straight-line basis over the average
remaining service period of active employees. Our plan assets consist primarily
of listed stocks (including $75 and $56 of AT&T common stock at December 31,
1997, and 1996, respectively), corporate and governmental debt, real estate
investments and cash and cash equivalents.
SAVINGS PLANS
We sponsor savings plans for the majority of our employees. The plans allow
employees to contribute a portion of their pretax and/or after-tax income in
accordance with specified guidelines. We match a percentage of the employee
contributions up to certain limits. Our contributions amounted to $201 in 1997,
$181 in 1996 and $158 in 1995.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
10. STOCK-BASED COMPENSATION PLANS
Under the 1997 Long-Term Incentive Program, which was effective June 1, 1997, we
grant stock options, performance shares, restricted stock and other awards.
There are 100 million shares of common stock available for grant with a maximum
of 15 million common shares that may be used for awards other than stock
options. The exercise price of any stock option is equal to the stock price when
the option is granted. Generally, the options vest over three years and are
exercisable up to ten years from the date of grant. Under the 1987 Long-Term
Incentive Program, which expired in April 1997, we granted the same awards, and
on January 1 of each year 0.6% of the outstanding shares of our common stock
became available for grant.
Under the 1997 Long-Term Incentive Program, performance share units are
awarded to key employees in the form of either common stock or cash at the end
of a three-year period based on AT&T's total shareholder return as measured
against a peer group of industry competitors. Under the 1987 Long- Term
Incentive Program, performance share units with the same terms were also awarded
to key employees based on AT&T's return-to-equity performance compared with a
target.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
On August 1, 1997, substantially all of our employees were granted a stock
option award to purchase 100 shares representing a total of 12.5 million shares
of our common stock. The options vest after three years and are exercisable up
to ten years from the grant date.
Under the AT&T 1996 Employee Stock Purchase Plan (Plan), which was effective
July 1, 1996, we are authorized to issue up to 50 million shares of common stock
to our eligible employees. Under the terms of the Plan, employees may have up to
10% of their earnings withheld to purchase AT&T's common stock. The purchase
price of the stock on the date of exercise is 85% of the average high and low
sale prices of shares on the New York Stock Exchange for that day. Under the
Plan, we sold approximately 4 million shares to employees in 1997 and 3 million
in 1996.
We apply Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations in accounting for our plans.
Accordingly, no compensation expense has been recognized for our stock-based
compensation plans other than for our performance-based and restricted stock
awards, SARs, and prior to July 1, 1996, for the stock purchase plan for former
McCaw Cellular Communications, Inc. employees. Compensation costs charged
against income were $110 and $46 in 1997 and 1996, respectively.
A summary of option transactions is shown below:
Weighted- Weighted-
Average Average
Exercise Exercise
Shares in Thousands 1997 Price 1996 Price 1995
Outstanding at January 1 50,977 $32.39 50,082 $41.68 42,638
Lucent and NCR
spin-off adjustments - - 22,678 - -
Options granted 38,310 $38.97 11,021 $41.27 13,545
Options and SARs
exercised (11,101) $24.51 (10,760) $19.10 (8,207)
Average exercise price $29.32
Options assumed in
purchase of LIN - - - - 3,382
Options canceled or
forfeited:
Lucent and NCR
spin-offs - - (16,179) $37.25 -
Other employee plans (4,205) $40.09 (5,865) $36.50 (1,276)
At December 31:
Options outstanding 73,981 $37.15 50,977 $32.39 50,082
Average exercise price $41.68
Options exercisable 22,981 $33.26 28,034 $28.81 28,775
Shares available
for grant 90,345 - 25,856 - 20,182
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
Effective on the dates of spin-off of Lucent and NCR, AT&T stock options held
by Lucent and NCR employees were canceled. For the holders of unexercised AT&T
stock options, the number of options was adjusted and all exercise prices were
decreased immediately following each spin-off date to preserve the economic
values of the options that existed prior to those dates.
During 1997 402,057 SARs were exercised and no SARs were granted. At December
31, 1997, 346,781 SARs remained unexercised, all of which were exercisable.
AT&T has adopted the disclosure-only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation." If AT&T had elected to recognize compensation
costs based on the fair value at the date of grant for awards in 1997, 1996 and
1995, consistent with the provisions of SFAS No. 123, AT&T's net income and
earnings per common share would have been reduced to the following pro forma
amounts:
For the Years Ended December 31 1997 1996 1995
Income from continuing operations $4,158 $ 5,385 $ 2,968
Income(loss) from discontinued operations 99 146 (2,902)
Gain on sale of discontinued operations 66 162 -
Net income $4,323 $5,693 $ 66
Earnings per common share-basic:
Continuing operations $ 2.34 $ 3.06 $ 1.71
Discontinued operations 0.05 0.08 (1.67)
Gain on sale of discontinued operations 0.04 0.09 -
Net income $ 2.43 $ 3.23 $ 0.04
Earnings per common share-diluted:
Continuing operations $ 2.33 $ 3.05 $ 1.70
Discontinued operations 0.05 0.08 (1.66)
Gain on sale of discontinued operations 0.04 0.09 -
Net income $ 2.42 $ 3.22 $ 0.04
Without the effect of pro forma costs related to the conversion of options in
the Lucent and NCR spin-offs, pro forma income from continuing operations was
$5,415, or $3.06 per diluted common share in 1996.
The pro forma effect on net income for 1997, 1996 and 1995 may not be
representative of the pro forma effect on net income of future years because the
SFAS No. 123 method of accounting for pro forma compensation expense has not
been applied to options granted prior to January 1, 1995.
The weighted-average fair values at date of grant for options granted during
1997, 1996 and 1995 were $9.09, $13.12 and $14.02, respectively, and were
estimated using the Black-Scholes option-pricing model. The risk-free interest
rates applied for 1997, 1996 and 1995 were 6.16%, 6.11% and 6.44%, respectively.
The following assumptions were applied for periods before the Lucent spin-off,
subsequent to the Lucent spin-off through December 31, 1996, and for 1997,
respectively: (i) expected dividend yields of 2.4%, 2.8% and 2.2%, (ii) expected
volatility rates of 19.0%, 21.0% and 21.8%, and (iii) expected lives of 5.0, 4.5
and 4.5 years.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
The following table summarizes information about stock options outstanding at
December 31, 1997:
Options Outstanding Options Exercisable
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding at Remaining Average Exercisable at Average
Exercise Dec. 31, 1997 Contractual Exercise Dec. 31, 1997 Exercise
Prices (in thousands) Life Price (in thousands) Price
$ 1.11 - $15.76 2,298 5.4 $ 9.78 318 $13.64
15.83 - 27.12 8,396 4.0 23.69 6,611 24.40
27.16 - 34.95 7,890 6.4 34.16 5,088 24.50
35.20 - 36.74 6,207 5.7 35.61 4,495 35.54
36.75 12,501 9.4 36.75 - 36.75
36.76 - 39.30 4,229 6.0 37.41 3,304 37.20
39.31 17,810 9.0 39.31 22 39.31
39.32 - 47.37 11,813 7.6 45.15 3,143 45.19
48.28 - 60.00 2,837 7.5 52.83 - -
73,981 7.5 $37.15 22,981 $33.26
11. DEBT OBLIGATIONS
DEBT MATURING WITHIN ONE YEAR
At December 31 1997 1996
Commercial paper $3,113 $1,950
Currently maturing long-term debt 961 487
Other 11 36
Total debt maturing within one year $4,085 $2,473
Weighted-average interest rate of
short-term debt 5.8% 5.5%
A consortium of lenders provides revolving credit facilities of approximately
$5.5 billion to AT&T. These credit facilities are intended for general corporate
purposes, which include support for AT&T's commercial paper, and were
substantially unused at December 31, 1997.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
LONG-TERM OBLIGATIONS
At December 31 1997 1996
Interest Rates (a) Maturities
DEBENTURES
4 3/8% to 4 3/4% 1998-1999 $ 500 $ 500
5 1/8% to 6% 2000-2001 500 500
8 1/8% to 8 5/8% 2002-2031 1,996 1,996
NOTES
5 9/38% to 7 3/4% 1998-2025 4,000 4,368
8% to 8 17/20% 1998-2025 579 786
9 3/5% to 12 7/8% 1998-2007 1,065 1,020
Variable rate 1998-2054 67 115
Total debentures and notes 8,707 9,285
Other 189 170
Less: Unamortized discount-net 78 90
Total long-term obligations 8,818 9,365
Less: Currently maturing long-term debt 961 487
Net long-term obligations $7,857 $8,878
(a) Note that the actual interest paid on our debt obligations may have differed
from the stated amount due to our entering into interest rate swap contracts to
manage our exposure to interest rate risk and our strategy to reduce finance
costs.
This table shows the maturities at December 31, 1997, of the $8,818 in total
long-term obligations:
1998 1999 2000 2001 2002 Later Years
$961 $1,073 $662 $658 $505 $4,959
12. FINANCIAL INSTRUMENTS
In the normal course of business we use various financial instruments, including
derivative financial instruments, for purposes other than trading. We do not use
derivative financial instruments for speculative purposes. These instruments
include letters of credit, guarantees of debt, interest rate swap agreements and
foreign currency exchange contracts. Interest rate swap agreements and foreign
currency exchange contracts are used to mitigate interest rate and foreign
currency exposures. Collateral is generally not required for these types of
instruments.
By their nature all such instruments involve risk, including the credit risk
of nonperformance by counterparties, and our maximum potential loss may exceed
the amount recognized in our balance sheet. However, at December 31, 1997, and
1996, in management's opinion there was no significant risk
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
of loss in the event of nonperformance of the counterparties to these financial
instruments. We control our exposure to credit risk through credit approvals,
credit limits and monitoring procedures. We do not have any significant exposure
to any individual customer or counterparty, nor do we have any major
concentration of credit risk related to any financial instruments.
LETTERS OF CREDIT
Letters of credit are purchased guarantees that ensure our performance or
payment to third parties in accordance with specified terms and conditions and
do not create any additional risk to AT&T.
GUARANTEES OF DEBT
From time to time we guarantee the debt of our subsidiaries and certain
unconsolidated joint ventures. Additionally, in connection with restructurings
of AT&T in 1996, we issued guarantees for certain debt obligations of AT&T
Capital and NCR. At December 31, 1997, and 1996, respectively, the amount of
guaranteed debt associated with AT&T Capital and NCR was $120 and $230.
INTEREST RATE SWAP AGREEMENTS
We enter into interest rate swaps to manage our exposure to changes in interest
rates and to lower our overall costs of financing. We enter into swap agreements
to manage the fixed/floating mix of our debt portfolio in order to reduce
aggregate risk to interest rate movements. Interest rate swaps also allow us to
raise funds at floating rates and effectively swap them into fixed rates that
are lower than those available to us if fixed-rate borrowings were made
directly. These agreements involve the exchange of floating-rate for fixed-rate
payments or fixed-rate for floating-rate payments without the exchange of the
underlying principal amount. Fixed interest rate payments at December 31, 1997,
are at rates ranging from 6.96% to 7.75%. Floating-rate payments are based on
rates tied to LIBOR.
The following table indicates the types of swaps in use at December 31, 1997,
and 1996, and their weighted-average interest rates. Average variable rates are
those in effect at the reporting date and may change significantly over the
lives of the contracts.
1997 1996
Fixed to variable swaps-notional amount $422 $632
Average receive rate 7.54% 7.55%
Average pay rate 5.67% 5.32%
Variable to fixed swaps-notional amount $249 $351
Average receive rate 5.70% 5.77%
Average pay rate 7.42% 5.71%
The weighted-average remaining terms of the swap contracts are 3 years for
1997 and 5 years for 1996.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
FOREIGN EXCHANGE
We enter into foreign currency exchange contracts, including forward
and option contracts, to manage our exposure to changes in currency exchange
rates, principally French francs, Deutsche marks, British pounds sterling and
Japanese yen. The use of these derivative financial instruments allows us to
reduce our exposure to the risk of adverse changes in exchange rates on the
eventual reimbursement to foreign telephone companies for their portion of the
revenues billed by AT&T for calls placed in the U.S. to a foreign country and
other foreign currency payables and receivables. These transactions are
generally expected to occur in less than one year.
FAIR VALUES OF FINANCIAL INSTRUMENTS INCLUDING DERIVATIVE FINANCIAL INSTRUMENTS
The following table summarizes the notional amounts of material financial
instruments. The notional amounts represent agreed-upon amounts on which
calculations of dollars to be exchanged are based. They do not represent amounts
exchanged by the parties and, therefore, are not a measure of our exposure. Our
exposure is limited to the fair value of the contracts with a positive fair
value plus interest receivable, if any, at the reporting date.
DERIVATIVES AND OFF BALANCE SHEET INSTRUMENTS
1997 1996
Contract/ Contract/
Notional Notional
Amount Amount
Interest rate swap agreements $671 $983
Foreign exchange:
Forward contracts 426 646
Option contracts 2 65
Letters of credit 63 264
Guarantees of debt 242 328
The tables below show the valuation methods and the carrying amounts and
estimated fair values of material financial instruments.
FINANCIAL INSTRUMENT VALUATION METHOD
Debt excluding capital leases Market quotes or based on rates
available to us for debt with
similar terms and maturities
Letters of credit Fees paid to obtain the
obligations
Guarantees of debt There are no quoted market prices
for similar agreements available
Interest rate swap agreements Market quotes obtained from dealers
Foreign exchange contracts Market quotes
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
For debt excluding capital leases, the carrying amounts and fair values were
$11,875 and $12,312, respectively, for 1997; and $11,279 and $11,709,
respectively, for 1996.
DERIVATIVES AND OFF BALANCE SHEET INSTRUMENTS
1997
Carrying Fair
Amount Value
Asset Liab. Asset Liab.
Interest rate swap agreements $3 $10 $5 $31
Foreign exchange
forward contracts - 21 3 33
1996
Carrying Fair
Amount Value
Asset Liab. Asset Liab.
Interest rate swap agreements $5 $ 8 $47 $12
Foreign exchange
forward contracts 6 15 7 35
13. COMMITMENTS AND CONTINGENCIES
In the normal course of business we are subject to proceedings, lawsuits and
other claims, including proceedings under laws and regulations related to
environmental and other matters. Such matters are subject to many uncertainties
and outcomes are not predictable with assurance. Consequently, we are unable to
ascertain the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at December 31, 1997. These matters could
affect the operating results of any one quarter when resolved in future periods.
However, we believe that after final disposition any monetary liability or
financial impact to us beyond that provided for at year-end would not be
material to our annual consolidated financial statements. We lease land,
buildings and equipment through contracts that expire in various years through
2032. Our rental expense under operating leases was $853 in 1997, $736 in 1996
and $665 in 1995. The following table shows our future minimum lease payments
due under noncancelable operating leases at December 31, 1997. Such payments
total $3,600. The total of minimum rentals to be received in the future under
noncancelable subleases as of December 31, 1997, was $275.
1998 1999 2000 2001 2002 Later Years
$686 $560 $474 $362 $275 $1,243
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
14. QUARTERLY INFORMATION (UNAUDITED)
1997 First Second Third Fourth
Revenues $12,688 $12,896 $13,090 $12,903
Operating income 1,616 1,482 1,747 1,991
Income from continuing operations 1,043 877 1,078 1,251
Income from discontinued
operations 38 31 20 11
Gain on sale of discontinued
operation - - 66 -
Net income 1,081 908 1,164 1,262
Income per common share-basic:
Continuing operations .59 .49 .60 .70
Discontinued operations .02 .02 .01 .01
Gain on sale of discontinued
operation - - .04 -
Net income .61 .51 .65 .71
Income per common share-diluted:
Continuing operations .59 .49 .60 .69
Discontinued operations .02 .02 .01 .01
Gain on sale of discontinued
operation - - .04 -
Net income .61 .51 .65 .70
Dividends declared .33 .33 .33 .33
Stock price*:
High $41 7/8 $38 1/4 $45 15/16 $63 15/16
Low 34 3/8 30 3/4 34 1/4 43 3/16
Quarter-end close 34 7/8 35 1/16 44 1/4 61 5/16
* Stock prices obtained from the Composite Tape
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
1996 First Second Third Fourth
Revenues $12,411 $12,455 $12,895 $12,927
Operating income 2,363 2,268 2,189 1,889
Income from continuing
Operations 1,420 1,490 1,346 1,202
Income(loss) from discontinued
Operations (77) (18) 52 216
Gain on sale of
discontinued operation - - - 162
Net income 1,343 1,472 1,398 1,580
Income(loss) per common share-basic:
Continuing operations .81 .85 .76 .68
Discontinued operations (.04) (.01) .03 .12
Gain on sale of
discontinued operation - - - .09
Net income .77 .84 .79 .89
Income(loss) per common share-diluted:
Continuing operations .81 .84 .76 .68
Discontinued operations (.04) (.01) .03 .12
Gain on sale of discontinued
operation - - - .09
Net income .77 .83 .79 .89
Dividends declared .33 .33 .33 .33
Stock price*:
High $68 7/8 $64 7/8 $62 3/8 $44 1/2
Low 60 1/8 58 49 1/4 33 1/4
Quarter-end close 61 1/8 62 52 1/4 43 3/8
* Stock prices obtained from the Composite Tape
Stock prices on or before September 30, 1996, have not been restated to
reflect the Lucent spin-off. Stock prices on or before December 31, 1996, have
not been restated to reflect the NCR spin-off.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
15. TELEPORT COMMUNICATIONS GROUP, INC. MERGER
On July 23, 1998, AT&T completed the merger with Teleport Communications Group
Inc. (TCG), pursuant to the plan of merger dated January 8, 1998. Each share of
TCG common stock was exchanged for 0.943 of AT&T common stock resulting in an
issuance of 181.6 million shares in the transaction. The merger is being
accounted for as a pooling of interests, and accordingly, AT&T's results of
operations, financial position and cash flows have been restated to reflect the
merger.
In August 1998, AT&T extinguished approximately $1 billion of debt. The early
extinguishment of this debt resulted in a pre-tax charge to AT&T of $217 million
($137 million after-tax) and was recorded as an extraordinary loss.
16. SUBSEQUENT EVENTS (UNAUDITED)
TELE-COMMUNICATIONS, INC. ACQUISITION
On June 24, 1998, AT&T signed a definitive merger agreement with
Tele-Communications, Inc. (TCI) for an all-stock transaction. Under the
agreement, AT&T will issue 0.7757 shares of AT&T common stock for each share of
TCI Group Series A common stock and 0.8533 shares of AT&T common stock for each
share of TCI Group Series B stock. The transaction, which is subject to
regulatory, shareowner and other approvals, is expected to be completed in the
first half of 1999. Also announced was TCI's intention to combine Liberty Media
Group, its programming arm, and TCI Ventures Group, its technology investments
unit, to form the new Liberty Media Group. Upon closing of the AT&T/TCI merger,
the shareowners of the new Liberty Media Group will be issued separate tracking
stock by AT&T in exchange for the shares currently held in Liberty Media Group
and TCI Ventures Group.
JOINT VENTURE WITH BRITISH TELECOMMUNICATIONS PLC (BT)
AT&T and BT announced on July 26, 1998 that they will create a global venture to
serve the complete communications needs of multinational companies and the
international calling needs of individuals and businesses around the world. The
venture, which will be owned equally by AT&T and BT, will combine trans-border
assets and operations of each company, including their existing international
networks, all of their international traffic, all of their trans-border products
for business customers -- including an expanding set of Concert services -- and
AT&T and BT's multinational accounts in selected industry sectors. The formation
of the venture is subject to certain conditions, including receipt of regulatory
approvals and the purchase by BT of MCI Communication Corporation's interest in
Concert and the final negotiation and execution of definitive documents. The
transaction is expected to be completed within 12 months.
Form 8-K
October 16, 1998 Exhibit 12
AT&T Corp.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
(Unaudited)
Six Months
Ended For the years ended December 31,
June 30, 1998 1997 1996 1995 1994 1993
Income from continuing
operations before
income taxes $ 1,637 $6,972 $8,694 $4,924 $6,989 $6,187
Less interest capitalized
during the period 110 254 193 107 39 61
Add equity investment losses,
net of distributions of
less than 50% owned
affiliates 124 144 155 205 91 59
Add fixed charges 454 846 855 730 777 1,014
Total Earnings from
Continuing operations
before income taxes
and fixed charges $2,105 $7,708 $9,511 $5,752 $7,818 $7,199
Fixed Charges:
Total interest expense
including capitalized
interest $ 318 $ 562 $ 610 $ 508 $ 540 $ 763
Interest portion of
rental expense 136 284 245 222 237 251
Total fixed charges 454 $ 846 $ 855 $ 730 $ 777 $1,014
Ratio of earnings
to fixed charges 4.6 9.1 11.1 7.9 10.1 7.1
Exhibit (23)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
AT&T Corp. ("AT&T" or the "Company") on Form S-3 for the Shareowner Dividend
Reinvestment and Stock Purchase Plan (Registration No. 333-00573), Form S-8 for
the AT&T Long Term Savings and Security Plan (Registration Nos. 333-47257 and
33-34265), Form S-8 for the AT&T Long Term Savings Plan for Management Employees
(Registration Nos. 33-34264, 33-29256 and 33-21937), Form S-8 for the AT&T
Retirement Savings and Profit Sharing Plan (Registration No. 33-39708), Form S-8
for Shares Issuable Under the Stock Option Plan of the AT&T 1987 Long Term
Incentive Program (Registration Nos. 333-47251 and 33-56643), Form S-8 for the
AT&T of Puerto Rico, Inc. Long Term Savings Plan for Management Employees
(Registration No. 33-50819), Form S-8 for the AT&T of Puerto Rico, Inc. Long
Term Savings and Security Plan (Registration No. 33-50817), and Post-Effective
Amendment No. 1 on Form S-8 to Form S-8 Registration Statement (Registration No.
33-54797) for the AT&T 1996 Employee Stock Purchase Plan, Form S-8 for the AT&T
Shares for Growth Program (Registration No. 333-47255), Form S-8 for the AT&T
1997 Long Term Incentive Program (Registration No. 33-28665), Form S-3 for the
AT&T $2,600,000,000 Notes and Warrants to Purchase Notes (Registration No.
33-49589), Form S-3 for the AT&T $3,000,000,000 Notes and Warrants to Purchase
Notes (Registration No. 33-59495), Form S-4 for the AT&T 5,000,000 Common Shares
(Registration No. 33-57745), and in Post-Effective Amendment Nos. 1, 2 and 3 on
Form S-8 to Form S-4 Registration Statement (Registration No. 33-42150) for the
NCR Corporation 1989 Stock Compensation Plan (Registration No. 33-42150-01), the
NCR Corporation 1984 Stock Option Plan (Registration No. 33-42150-02) and the
NCR Corporation 1976 Stock Option Plan (Registration No. 33-42150-03),
respectively, and the Post-Effective Amendment Nos. 1, 2, 3 and 5 on Form S-8 to
Form S-4 Registration Statement (Registration No. 33-52119) for the McCaw
Cellular Communications, Inc. 1983 Non-Qualified Stock Option Plan (Registration
No. 33-52119-01), the McCaw Cellular Communications, Inc. 1987 Stock Option Plan
(Registration No. 33-52119-02), the McCaw Cellular Communications, Inc. Equity
Purchase Plan (Registration No. 33-52119-03) and the McCaw Cellular
Communications, Inc. Employee Stock Purchase Plan (Registration No.
33-52119-05), respectively, and Post-Effective Amendment No. 1 on Form S-8 to
Form S-4 Registration Statement (Registration No. 33-45302) for the Teradata
Corporation 1987 Incentive and Other Stock Option Plan (Registration No.
33-45302-01), Form S-8 for the AT&T Amended and Restated 1969 Stock Option Plan
for LIN Broadcasting Corp. (Registration No. 33-63195), and in Post Effective
Amendment Nos. 1, 2, 3, 4 and 5 on Form S-8 to Form S-4 Registration Statement
(Registration No. 333-49419) for the Teleport Communications Group Inc. 1993
Stock Option Plan (Registration No. 333-49419-01), Teleport Communications Group
Inc. 1996 Equity Incentive Plan (Registration No. 333-49419-02), ACC Corp.
Employee Long Term Incentive Plan (Registration No. 333-49419-03), ACC Corp.
Non-Employee Directors' Stock Option Plan (Registration No. 333-49419-04) and
ACC Corp. 1996 UK Sharesave Scheme (Registration No. 333-49419-05), and Form S-8
for AT&T Wireless Services, Inc. Employee Stock Purchase Plan (Registration No.
333-52757) of our report dated January 26, 1998, on our audits of the
consolidated financial statements of the Company and its subsidiaries at
December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996 and
1995, which report is included in this Current Report on Form 8-K.
PRICEWATERHOUSECOOPERS L.L.P.
1301 Avenue of the Americas
New York, New York
October 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated balance sheet of AT&T Corp. at June 30, 1998 and the
unaudited consolidated statement of income for the six-month period ended June
30, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 7,845
<SECURITIES> 123
<RECEIVABLES> 9,894
<ALLOWANCES> 1,044
<INVENTORY> 0
<CURRENT-ASSETS> 19,179
<PP&E> 48,059
<DEPRECIATION> 23,815
<TOTAL-ASSETS> 60,973
<CURRENT-LIABILITIES> 14,725
<BONDS> 7,161
0
0
<COMMON> 1,806
<OTHER-SE> 23,861
<TOTAL-LIABILITY-AND-EQUITY> 60,973
<SALES> 0
<TOTAL-REVENUES> 26,042
<CGS> 0
<TOTAL-COSTS> 25,210
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 714
<INTEREST-EXPENSE> 208
<INCOME-PRETAX> 1,637
<INCOME-TAX> 582
<INCOME-CONTINUING> 1,055
<DISCONTINUED> 1,300
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,355
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.30
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated unaudited balance sheet of AT&T Corp. at March 31, 1998 and the
unaudited consolidated statement of income for the three-month period ended
March 31, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 328
<SECURITIES> 245
<RECEIVABLES> 9,667
<ALLOWANCES> 1,020
<INVENTORY> 0
<CURRENT-ASSETS> 16,215
<PP&E> 46,663
<DEPRECIATION> 23,084
<TOTAL-ASSETS> 59,417
<CURRENT-LIABILITIES> 15,844
<BONDS> 7,342
0
0
<COMMON> 1,789
<OTHER-SE> 22,474
<TOTAL-LIABILITY-AND-EQUITY> 59,417
<SALES> 0
<TOTAL-REVENUES> 12,831
<CGS> 0
<TOTAL-COSTS> 11,477
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 357
<INTEREST-EXPENSE> 80
<INCOME-PRETAX> 1,980
<INCOME-TAX> 726
<INCOME-CONTINUING> 1,254
<DISCONTINUED> 10
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,264
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.70
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of AT&T Corp. at December 31, 1997 and the
consolidated statement of income for the twelve-month period ended December 31,
1997 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 318
<SECURITIES> 307
<RECEIVABLES> 9,663
<ALLOWANCES> 988
<INVENTORY> 0
<CURRENT-ASSETS> 16,777
<PP&E> 46,436
<DEPRECIATION> 22,233
<TOTAL-ASSETS> 61,095
<CURRENT-LIABILITIES> 17,317
<BONDS> 7,857
0
0
<COMMON> 1,789
<OTHER-SE> 21,889
<TOTAL-LIABILITY-AND-EQUITY> 61,095
<SALES> 0
<TOTAL-REVENUES> 51,577
<CGS> 0
<TOTAL-COSTS> 44,741
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,522
<INTEREST-EXPENSE> 307
<INCOME-PRETAX> 6,972
<INCOME-TAX> 2,723
<INCOME-CONTINUING> 4,249
<DISCONTINUED> 166
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,415
<EPS-PRIMARY> 2.48
<EPS-DILUTED> 2.47
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated 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> 368
<SECURITIES> 150
<RECEIVABLES> 10,033
<ALLOWANCES> 1,056
<INVENTORY> 0
<CURRENT-ASSETS> 16,071
<PP&E> 44,091
<DEPRECIATION> 21,758
<TOTAL-ASSETS> 58,568
<CURRENT-LIABILITIES> 16,205
<BONDS> 8,149
0
0
<COMMON> 1,781
<OTHER-SE> 20,955
<TOTAL-LIABILITY-AND-EQUITY> 58,568
<SALES> 0
<TOTAL-REVENUES> 38,674
<CGS> 0
<TOTAL-COSTS> 33,829
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,185
<INTEREST-EXPENSE> 241
<INCOME-PRETAX> 4,975
<INCOME-TAX> 1,977
<INCOME-CONTINUING> 2,998
<DISCONTINUED> 155
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,153
<EPS-PRIMARY> 1.77
<EPS-DILUTED> 1.77
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated balance sheet of AT&T Corp. at June 30, 1997 and the
unaudited consolidated statement of income for the six-month period ended June
30, 1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 129
<SECURITIES> 362
<RECEIVABLES> 9,687
<ALLOWANCES> 994
<INVENTORY> 0
<CURRENT-ASSETS> 15,625
<PP&E> 42,269
<DEPRECIATION> 21,054
<TOTAL-ASSETS> 57,106
<CURRENT-LIABILITIES> 15,303
<BONDS> 8,296
0
0
<COMMON> 1,781
<OTHER-SE> 20,332
<TOTAL-LIABILITY-AND-EQUITY> 57,106
<SALES> 0
<TOTAL-REVENUES> 25,584
<CGS> 0
<TOTAL-COSTS> 22,486
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 812
<INTEREST-EXPENSE> 166
<INCOME-PRETAX> 3,171
<INCOME-TAX> 1,251
<INCOME-CONTINUING> 1,920
<DISCONTINUED> 69
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,989
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.12
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated 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>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 354
<SECURITIES> 411
<RECEIVABLES> 9,768
<ALLOWANCES> 1,006
<INVENTORY> 0
<CURRENT-ASSETS> 16,380
<PP&E> 40,897
<DEPRECIATION> 20,417
<TOTAL-ASSETS> 56,593
<CURRENT-LIABILITIES> 14,664
<BONDS> 8,931
0
0
<COMMON> 1,780
<OTHER-SE> 19,932
<TOTAL-LIABILITY-AND-EQUITY> 56,593
<SALES> 0
<TOTAL-REVENUES> 12,688
<CGS> 0
<TOTAL-COSTS> 11,072
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 431
<INTEREST-EXPENSE> 81
<INCOME-PRETAX> 1,711
<INCOME-TAX> 668
<INCOME-CONTINUING> 1,043
<DISCONTINUED> 38
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,081
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.61
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of AT&T Corp. at December 31, 1996 and the
consolidated statement of income for the twelve-month period ended December 31,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 196
<SECURITIES> 441
<RECEIVABLES> 9,972
<ALLOWANCES> 948
<INVENTORY> 0
<CURRENT-ASSETS> 17,775
<PP&E> 40,689
<DEPRECIATION> 19,886
<TOTAL-ASSETS> 57,348
<CURRENT-LIABILITIES> 16,313
<BONDS> 8,878
0
0
<COMMON> 1,774
<OTHER-SE> 19,318
<TOTAL-LIABILITY-AND-EQUITY> 57,348
<SALES> 0
<TOTAL-REVENUES> 50,688
<CGS> 0
<TOTAL-COSTS> 41,979
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,518
<INTEREST-EXPENSE> 417
<INCOME-PRETAX> 8,697
<INCOME-TAX> 3,239
<INCOME-CONTINUING> 5,458
<DISCONTINUED> 335
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,793
<EPS-PRIMARY> 3.29
<EPS-DILUTED> 3.28
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated balance sheet of AT&T Corp. at December 31, 1995 and the
consolidated statement of income for the twelve-month period ended December 31,
1995 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 87
<SECURITIES> 0
<RECEIVABLES> 9,198
<ALLOWANCES> 798
<INVENTORY> 0
<CURRENT-ASSETS> 20,584
<PP&E> 34,119
<DEPRECIATION> 17,666
<TOTAL-ASSETS> 62,864
<CURRENT-LIABILITIES> 24,544
<BONDS> 8,913
0
0
<COMMON> 1,746
<OTHER-SE> 15,654
<TOTAL-LIABILITY-AND-EQUITY> 62,864
<SALES> 0
<TOTAL-REVENUES> 48,449
<CGS> 0
<TOTAL-COSTS> 43,280
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,125
<INTEREST-EXPENSE> 514
<INCOME-PRETAX> 4,925
<INCOME-TAX> 1,944
<INCOME-CONTINUING> 2,981
<DISCONTINUED> (2,896)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
Form 8-K Exhibit 99.1
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
For the six months ended June 30, 1998
OVERVIEW
On July 23, 1998, AT&T completed the merger with Teleport Communications, Inc.
(TCG), the largest competitive local exchange carrier. Each share of TCG common
stock was exchanged for 0.943 of AT&T common stock resulting in an issuance of
181.6 million shares in the transaction. The merger was accounted for as a
pooling of interests, and accordingly, AT&T's historical financial statements
have been restated to reflect the combined results of AT&T and TCG.
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 Corp. ("AT&T" or the
"Company") reflect the dispositions of AT&T's submarine systems business (SSI),
which was sold to Tyco International Ltd. on July 1, 1997, and the sale of
Universal Card Services, Inc. (UCS) which was sold to Citibank on April 2, 1998,
as discontinued operations. Accordingly, the revenues, costs and expenses,
assets and liabilities, and cash flows of SSI and UCS 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 from discontinued
operations", net of applicable income taxes; as "Net assets of discontinued
operations"; and as "Net cash provided by discontinued operations."
The discussion and analysis of AT&T's results of operations is discussed for
consolidated AT&T, as well as by business segment: business services, consumer
services, wireless services, and other and corporate. Supplemental information
is also included for local services, new wireless services businesses, AT&T
Solutions, WorldNet and other on-line services, and international operations and
ventures. Earnings before interest and taxes (EBIT), including other income,
total assets and other related information is discussed for the consolidated
results of AT&T and by business segment.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Six months
ended
June 30, Change
$ in millions 1998 1997 $ %
Total revenues.............................$26,042 $25,584 $ 458 1.8%
OTHER INCOME STATEMENT ITEMS
Operating income........................... 832 3,098 (2,266) (73.1)%
Operating margin........................... 3.2% 12.1%
Operating income, adjusted for charges
and reserve reversal*.................... 4,176 3,158 1,018 32.2%
Operating margin, adjusted for charges
and reserve reversal*.................... 16.0% 12.3%
EBIT....................................... 1,845 3,337 (1,492) (44.7)%
EBIT, adjusted for gains, charges
and reserve reversal*.................... 4,419 3,300 1,119 33.9%
EBITDA**................................... 4,068 5,279 (1,211) (22.9)%
EBITDA, adjusted for gains, charges
and reserve reversal*.................... 6,642 5,162 1,480 28.7%
Diluted earnings per share,
continuing operations....................$ 0.58 $ 1.08 $ (0.50) (46.3)%
Diluted earnings per share,
continuing operations, adjusted for
gains, charges and reserve reversal*.....$ 1.45 $ 1.07 $ 0.38 35.5%
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
* Operating income for the first six months of 1998 included $3,344
million of restructuring and other charges, with an after-tax
diluted earnings per share reduction of $1.14 per share. EBIT for the six
months ended June 30, 1998 also included pre-tax gains on the sales of
LIN Television Corporation (LIN-TV) of $317 million, AT&T Solutions
Customer Care of $350 million and AT&T's investment in Smartone
Telecommunications Holdings Limited (SmarTone) of $103 million. After
taxes, these gains totaled $0.27 per diluted share.
Operating income for the six months ended June 30, 1997 contained a $160
million charge, or a reduction of $0.05 per share, for exiting the
two-way messaging business and a $100 million benefit, or $0.03 per
share, from the reversal of pre-1995 restructuring charges. In addition,
EBIT also included a $97 million pre-tax gain, or $0.03 per share
after-tax, on the sale of AT&T Skynet Satellite Services (Skynet).
** Earnings before interest, taxes, depreciation and amortization
The following discussion, unless noted, excludes the items mentioned above.
Revenues from continuing operations increased $458 million, or 1.8%, for the six
months ended June 30, 1998 compared to the same period in 1997. Long-distance
services revenues decreased 0.9% compared to the first six months of 1997, while
calling volumes increased 4.8%.
Operating income increased $1,018 million, or 32.2%, to $4,176 million for the
six months ended June 30, 1998 compared to the same period in 1997. For the six
months ended June 30, 1998, operating margin showed improvement of 370 basis
points compared to the first six months of 1997. EBIT increased $1,119 million,
or 33.9%, to $4,419 million from $3,300 million in the in the first six months
of 1997. The year over year increases in both operating income and EBIT were
primarily due to the Company's cost reduction efforts partially offset by higher
depreciation and amortization expenses which reflect our continued investments
in the AT&T networks.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
For the six months ended June 30, 1998, EBITDA increased 28.7% to $6,642 million
from $5,162 million for the first six months of 1997. Once again, the
improvement was primarily the result of our cost reduction efforts.
For the six months ended June 30, 1998, earnings per share was $1.45, an
increase of $0.38, or 35.5%, compared to earnings per share of $1.07 for the
same period in 1997.
RESULTS OF OPERATIONS
Six months
ended
June 30, Change
$ in millions 1998 1997 $ %
REVENUES
Business services..........................$11,373 $10,984 $ 389 3.5%
Consumer services.......................... 11,283 11,801 (518) (4.4)%
Wireless services.......................... 2,477 2,271 206 9.1%
Other and corporate........................ 1,549 1,199 350 29.1%
Eliminations............................... (640) (671) 31 4.6%
Total revenues.............................$26,042 $25,584 $ 458 1.8%
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
REVENUES
For the first six months of 1998, revenues from continuing operations increased
$458 million, or 1.8%, compared to the same period in 1997. Increases in
business services, other and corporate and wireless services revenues were
partially offset by a decline in consumer services revenue. Long-distance
services revenues declined 0.9% for the six months ended June 30, 1998 compared
to the same period in 1997 as calling volumes increased 4.8%.
OPERATING EXPENSES
Access and other interconnection expenses for the six months ended June 30, 1998
decreased $683 million, or 8.0%, compared to the same period in 1997. The
decline relates primarily to lower international settlement rates, a reduction
in access charges due to a reduction in per minute access expenses and AT&T's
continuing efforts to manage these costs. Reductions in per-minute access
expenses were partially offset by Primary Interexchange Carrier Charges (PICC),
AT&T's contribution to the Universal Service Fund (USF) and volume increases.
Access and other interconnection expenses as a percentage of long-distance
services revenues were 34.7% for the first half of 1998 and 37.4% for the first
half of 1997.
Network and other communications services expenses increased $141 million, or
3.1%, for the first six months of 1998 compared to the same period of 1997.
Increased costs related primarily to increased data traffic on the AT&T network,
higher expenditures for wireless handsets, costs associated with the expansion
of the local communications network and the first quarter 1997 reversal of the
non-recurring pre-1995 restructuring charge. These increases were partially
offset by a lower provision for uncollectibles and $80 million of the two-way
messaging charge recorded in the first quarter of 1997.
For the six month period ended June 30, 1998, depreciation and amortization
expenses increased $286 million, or 15.0%, from the same period in 1997.
Excluding the $80 million impact of the two-way messaging charges in the first
quarter of 1997, depreciation expense increased $366 million, or 20.0%, for the
six months ended June 30, 1998, compared to the same period in 1997. These
increases were primarily due to continued high levels of capital expenditures.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
For the six months ended June 30, 1998, selling, general and administrative
(SG&A) expenses decreased $364 million, or 4.9%, compared to the same period in
1997. The reduced level of expenses reflects AT&T's efforts to achieve a
best-in-class cost structure, including the removal of $1.6 billion in SG&A
expenses from the business in 1998 (excluding Teleport Communications Group,
Inc. (TCG)) and a 22% ratio of SG&A expenses to revenues by the end of 1999.
Excluding SG&A expenses for TCG, SG&A expenses for the six months ended June 30,
1998 decreased $435 million, or 5.9%, compared to the six months ended June 30,
1997. The decrease was due primarily to a decline in costs associated with
marketing and sales in consumer services, as a result of better targeting and
efficiency gains in customer acquisition efforts, and lower marketing and sales
in business services, achieved largely through consolidation of functions and
reductions of support staff headcount. These declines were partially offset by
increased expenses for new wireless services businesses due to the activation of
new markets since June 1997, higher costs associated with the year 2000
initiatives and higher local costs primarily resulting from TCG's expanded
business. For the six months ended June 30, 1998, SG&A expenses as a percentage
of total revenues decreased to 27.2% compared to 29.1% for the first six months
of 1997. In order to achieve a $1.6 billion reduction in SG&A expenses for 1998,
AT&T must reduce SG&A expenses at a greater rate in the second half of 1998
versus the first half. Much of this expense reduction will be achieved as a
result of headcount reductions associated with the VRIP.
AT&T has established processes for evaluating and managing the risks and costs
associated with preparing our systems and applications for the year 2000. The
Company expects to incur internal staff costs as well as consulting and other
expenses related to the conversion and testing of our systems and applications.
We incurred $96 million in expenses for the year 2000 in the six month period
ended June 30, 1998. We expect the cost of this project to be approximately $300
million in 1998. More than half of these costs represent internal information
technology resources that have been redeployed from other projects and are
expected to return to these projects upon completion. We plan on having
substantially all modifications completed by the end of 1998, leaving a full
year for testing. We are still assessing the impact to us, if any, in 1999.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Restructuring and other charges for the six months ended June 30,
1998 totaled $3,344 million. This is comprised of second quarter charges of
$2,743 million plus a $601 million pre-tax charge recorded in the first quarter
of 1998. During the second quarter of 1998 AT&T recorded restructuring charges
of $2,743 million primarily in connection with a plan, announced on January 26,
1998, to reduce headcount by 15,000 to 18,000 over two years as part of the
Company's overall cost reduction program. In connection with this plan, a
voluntary retirement incentive program (VRIP) was offered to eligible management
employees. Approximately 15,300 management employees accepted the VRIP offer.
The restructuring charges of $2,743 million include a pre-tax charge of $2,724
million, comprised of $2,412 million for pension special termination benefits
and other costs and $312 million for postretirement special termination benefits
and curtailment losses. This amount will be partially offset by approximately
$1.1 billion of gains to be recognized in the third and fourth quarters of this
year as employees' pension benefit obligations are settled. The amount of gains
to be recognized in future periods is subject to market fluctuations. Due to the
capital market downturn and the lowering of the discount rate, as of the
beginning of October, we estimate that the gains will be $0.7 billion.
The restructuring charges of $2,743 million also include pre-tax charges of $125
million for facility costs and $150 million for executive separation costs. The
second quarter charges were partially offset by the reversal of $256 million
(pre-tax) of 1995 business restructuring reserves primarily resulting from the
overlap of VRIP on certain 1995 projects.
The $601 million first quarter charge related to the Company's decision not to
pursue Total Service Resale (TSR) as a local service strategy. The pre-tax
charge includes a $543 million write-down of software, $42 million primarily
related to equipment associated with the software platform and $16 million for
the termination of certain contracts. The Company's in-market experiences and
results have proven that the TSR solution is not economically viable for the
short-term or the long-term.
AT&T continues its financial and operational review of the various alternatives
for entering the local market, including the impacts associated with the merger
with TCG and the pending merger with Tele-Communications, Inc. (TCI). In
addition, certain fixed assets which were purchased as part of the TSR
initiative may also be impaired. These assets are currently being evaluated in
conjunction with the TCG merger to determine if any assets are impaired.
Management expects to complete this review by the end of the fourth quarter.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OTHER INCOME STATEMENT ITEMS
For the six months ended June 30, 1998, other income-net increased $774 million,
or 323.9%, to $1,013 million compared with the same period in 1997. This
increase is mainly due to pre-tax gains associated with the strategy of exiting
non-strategic businesses. In 1998, we recorded gains on the sales of AT&T
Solutions Customer Care of $350 million, LIN-TV of $317 million and SmarTone of
$103 million as well as an increase in interest income on temporary cash
investments. These increases were partially offset by the $97 million pre-tax
gain on the sale of Skynet in 1997.
Interest expense increased $42 million, or 24.9%, for the six months ended June
30, 1998 compared to the same period in 1997. These increases were mainly due to
the reclassification of interest expense from discontinued operations to
continuing operations resulting from AT&T not retiring all of the UCS related
debt upon the sale of UCS.
The provision for income taxes for the six months ended June 30, 1998 decreased
$669 million, or 53.4%, compared with the same period in 1997. Excluding the
impact of the first and second quarter restructuring and other charges,
the provision for income taxes for the six months ended June 30, 1998
increased $610 million, or 48.9%, compared with the same period in 1997. The
increase is primarily due to an increase in income before income taxes partially
offset by a lower effective tax rate. The adjusted effective tax rate for the
six months ended June 30, 1998 was 37.4% a decrease of 200 basis points from the
six months ended June 30, 1997. The decrease in the effective tax rate was
principally due to the tax impacts of certain investment dispositions and
foreign legal entity restructurings.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Income from discontinued operations decreased $59 million for the six month
period ended June 30, 1998, compared to the same period of 1997. In 1998 the
results of discontinued operations included the results of UCS. In 1997 the
results of discontinued operations included the results of both UCS and SSI,
which was sold on July 1, 1997. On April 2, 1998, AT&T sold UCS for $3,500
million, resulting in an after-tax gain on sale of discontinued operation of
$1,290 million or $.71 per share.
SEGMENT RESULTS
AT&T's results are segmented according to the Company's primary lines of
business: business services, consumer services, and wireless services. A fourth
segment, identified as other and corporate, includes the results of AT&T
Solutions, international operations and ventures, on-line services such as AT&T
WorldNet Internet access, and various other items. The results of these four
segments plus the impact of the elimination of internal business sum to AT&T's
total results. The following is a discussion of each of these segments, as well
as supplemental information on local services, new wireless services businesses,
AT&T Solutions, WorldNet and other on-line services, and international
operations and ventures.
Total assets for each segment include all assets, except interentity
receivables. Deferred taxes, prepaid pension assets, and corporate-owned or
leased real estate are held at the corporate level and therefore are included in
the other and corporate segment. Shared network assets are allocated to the
segments based on the prior three years' volumes and are reallocated each
January.
BUSINESS SERVICES
Business services results reflect sales of long-distance services (domestic and
international, inbound and outbound, inter- and intraLATA toll services, calling
card and operator-handled services, data services, messaging and other network
enabled services), local services and web hosting and other electronic commerce
services.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Six months
ended
June 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$11,373 $ 10,984 $389 3.5%
EBIT................................. 2,379 2,244 135 6.0%
EBIT, excluding gain on Skynet 2,379 2,147 232 10.8%
EBITDA............................... 3,409 3,071 338 11.0%
EBITDA, excluding gain on Skynet 3,409 2,974 435 14.6%
OTHER ITEMS
Capital additions....................$ 1,717 $ 1,304 $413 31.5%
At June 30, At Dec. 31, Change
1998 1997 $ %
Total assets*........................$15,933 $ 15,030 $903 6.0%
* Includes allocated shared network assets of $10,816 and $10,246 at June 30,
1998 and December 31, 1997, respectively.
REVENUE
Business service revenue grew to $11,373 million in the six months ended June
30, 1998, compared to the six months ended June 30, 1997. This is an increase of
$389 million, or 3.5%, compared to the first six months of 1997. Adjusted for
the sales of Tridom and Skynet, revenues grew 4.1% in the six months ended June
30, 1998, compared to the same period in 1997. Data services led the growth in
business services revenue with double-digit increases for the six month period
ended June 30, 1998, compared to the same period in 1997, though growth was
tempered by an outage in AT&T's frame relay network in April 1998. AT&T did not
bill customers for service during the outage and for a period of time until the
cause and solution of the problem were identified. Though essentially immaterial
to AT&T's overall earnings, the interruption reduced business services' revenue
growth. Based on favorable customer response to AT&T's handling of the
situation, this impact is expected to be confined to the second quarter.
For the six months ended June 30, 1998, long-distance services revenue increased
3.3% compared to the same period in 1997. For the six months ended June 30,
1998, long-distance calling volume increased at a low-double-digit rate compared
to the same period in 1997. The volume increase was led by growth in inbound
calling. Volume growth continues to be pressured by lower usage of calling cards
and operator-handled services, which are increasingly being replaced by wireless
service. Voice-related revenue for the six months ended June 30, 1998, was
essentially flat compared to the same periods last year, as AT&T continues to
experience declines in average revenue per minute. Price declines have occurred
due primarily to competitive forces; however, other factors such as migration
from switched to nodal services and growth in lower-priced intraLATA minutes
have also contributed to the decline in average price.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
EBIT/EBITDA
The following discussion excludes the first quarter 1997 gain on the sale of
Skynet.
EBIT increased 10.8% to $2,379 million for the six months ended June 30, 1998,
from $2,147 million in the same period in 1997. EBITDA increased 14.6% to $3,409
million for the first six months of 1998 from $2,974 million for the six months
ended June 30, 1997. The increase was driven by progress toward AT&T's
company-wide cost reduction goals. In particular, streamlining of customer care
and sales support functions, including significant headcount reductions
contributed to the increases. Higher levels of depreciation accounted for the
slower rate of EBIT growth as compared EBITDA.
OTHER ITEMS
For the six months ended June 30, 1998, capital additions increased $413
million, or 31.5%, compared to the same period in 1997. Capital additions for
the first six months of 1998 include investment in AT&T's SONET program, the
AT&T Digital Link product for local service and data networks.
Total assets increased $903 million, or 6.0%, to $15,933 million at June 30,
1998, from $15,030 million at December 31, 1997. The increase was primarily due
to 1998 capital expenditures and the reallocation of shared network assets,
partially offset by current year depreciation.
CONSUMER SERVICES
Consumer services results reflect sales of long-distance services (including
domestic and international, inter- and intraLATA toll services, calling card and
operator handled calling, and prepaid calling cards) and local service to
residential customers.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Six months
ended
June 30, Change
$ in millions 1998 1997 $ %
Revenue.............................$11,283 $11,801 $ (518) (4.4)%
EBIT................................ 2,892 2,242 650 29.0%
EBITDA.............................. 3,236 2,608 628 24.0%
OTHER ITEMS
Capital additions...................$ 140 $ 319 $ (179) (56.2)%
At June 30, At Dec. 31, Change
1998 1997 $ %
Total assets*.......................$ 6,867 $ 7,923 $(1,056) (13.3)%
* Includes allocated shared network assets of $3,100 and $4,168 at June 30, 1998
and December 31, 1997, respectively.
REVENUE
For the six months ended June 30, 1998, revenues decreased $518 million, or
4.4%, on a low-single-digit decline in calling volumes. The decline in revenue
for the six months ended June 30, 1998, resulted in part from access cost
reductions implemented in July 1997, which we have passed along to customers
through lower basic rates and migration to more favorable calling plans. The
controlled migration of customers to more favorable calling plans concurrent
with reductions in the Company's cost structure is a key part of AT&T's strategy
to retain profitable customers. As a result of this strategy, AT&T now has over
23 million customers on its One Rate plans, including more than 10 million on
One Rate Plus. More than 75% of AT&T's consumer long-distance minutes were
generated by customers on optional calling plans. Also, the Company's emphasis
on high-value customers results in fewer customer acquisitions. While this
approach continues to restrain revenue and volume growth, it is key to AT&T's
strategy of optimizing its customer base for profitable future growth.
Competition in domestic and international long-distance markets, including the
impact of dial around, contributed to the lower revenue and volume growth rates
for the six months ended June 30, 1998, as did substitution of wireless services
for calling card and other higher-priced long-distance services. Reductions in
international long-distance pricing consistent with falling international
settlement rates also contributed to the decrease in revenue.
AT&T's progress in intraLATA toll markets for the six months ended June 30, 1998
continues to offset part of the decline in revenue and volume. AT&T now competes
in 42 states for presubscribed local toll service, has claimed double-digit
market share in each state, and now has 11 million total subscribed intraLATA
customers.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
EBIT/EBITDA
For the first six months of 1998, EBIT increased 29.0% to $2,892 million and
EBITDA increased $628 million, or 24.0%, to $3,236 million. These increases were
driven primarily by reduced marketing and sales expenses. AT&T's focus on
high-value customers has led to lower, yet more productive customer acquisition
and retention spending. Simplification and consolidation of marketing messages
has also generated substantial efficiencies, and consumer services has increased
its use of alternate, more efficient distribution channels. To date, AT&T has
received over 52 thousand on-line orders for various consumer services. For
example, One Rate On-line offers activation, customer care and billing over the
Internet with payment via credit card.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
WIRELESS SERVICES
Wireless services results include sales of wireless services and products to
customers in 850 MHz cellular markets and 1.9 GHz markets. Also included are the
results of the messaging, aviation communications, and wireless data divisions,
as well as the costs associated with the development of fixed wireless
technology. The impact of the new 1.9 GHz markets, wireless data, two-way
messaging and fixed wireless development are discussed as "new wireless services
businesses"; all other wireless results are reflected as "core" businesses.
TOTAL WIRELESS SERVICES
Six months
ended
June 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 2,477 $ 2,271 $ 206 9.1%
EBIT................................. 182 128 54 41.9%
EBIT excluding gain on SmarTone
and two-way messaging charge........ 79 288 (209) (72.5)%
EBITDA............................... 711 623 88 14.1%
EBITDA excluding gain on SmarTone
and two-way messaging charge........ 608 703 (95) (13.5)%
OTHER ITEMS
Capital additions....................$ 413 $ 1,123 $(710) (63.2)%
At June 30, At Dec. 31, Change
1998 1997 $ %
Total assets.........................$18,026 $18,540 $(514) (2.8)%
REVENUE
Wireless services revenue grew $206 million, or 9.1%, in the first six months
ended June 30, 1998, compared to the same period of 1997. The increase was
driven by the overwhelming response to AT&T's Digital One Rate offer coupled
with our ongoing focus on high-value customers. Digital One Rate is a key
element of our ongoing efforts to acquire and retain profitable, high-value
customers. This strategy has had a significant positive impact on average
revenue per user (ARPU), slowing its decline.
Migration of customers to digital service is another key element of AT&T's
wireless strategy. Digital service generates lower network costs and improves
customer retention. As of June 30, 1998, 45% of AT&T's 6.484 million
consolidated subscribers used digital service, up from 21% at June 30, 1997.
Including partnership markets, the Company had over 3.4 million digital
subscribers at the end of the second quarter of 1998.
Total cellular customers served by companies in which AT&T has or shares a
controlling interest increased 15.4% to 8.750 million at June 30, 1998, from
7.584 million at June 30, 1997. At June 30, 1998, there were 1.345 million
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
messaging subscribers compared to 1.231 million, or a 9.3% increase, compared to
a year ago.
EBIT/EBITDA
The following discussion excludes the second quarter 1998 gain on the sale of
SmarTone and the first quarter 1997 charge to exit the two-way messaging
business.
EBIT was $79 million for the first six months of 1998, a decrease of $209
million, or 72.5%, from $288 million for the first six months of 1997. The
decrease was due primarily to higher losses for new wireless services businesses
in the current year compared to the prior year period. EBIT for new wireless
services businesses was negative $315 million for first six months of 1998,
compared to negative $99 million for the first six months of 1997. The decline
was due primarily to the roll-out of additional markets. Core EBIT was $394
million for the first six months of 1998, compared to $387 million for the same
period last year.
EBITDA was $608 million in the first six months of 1998, a decrease of $95
million, or 13.5%, from $703 million for the first six months of 1997. EBITDA
for new wireless services businesses was negative $226 million for the first six
months of 1998, compared to negative $83 million for the first six months of
1997. The decline was due primarily to the roll-out of additional markets. Core
EBITDA was $834 million for the first six months, compared to $786 million for
the same period last year.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OTHER ITEMS
Capital additions decreased $710 million to $413 million for the six month
period ended June 30, 1998, compared with $1,123 million for the same period in
1997. These decreases were primarily due to the completion of the majority of
AT&T's 1.9 GHz market buildouts. Capital spending for the year-to-date period
ended June 30, 1998 was directed primarily at expanding coverage in new and
traditional markets.
NEW WIRELESS SERVICES BUSINESSES
Six months
ended
June 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 93 $ 5 $ 88 NMF
EBIT................................. (315) (259) (56) (21.6)%
EBIT excluding two-way charge........ (315) (99) (216) (219.0)%
EBITDA............................... (226) (163) (63) (38.2)%
EBITDA excluding two-way charge...... (226) (83) (143) (171.7)%
OTHER ITEMS
Capital additions....................$ 199 $ 783 $(584) (74.5)%
At June 30, At Dec. 31, Change
1998 1997 $ %
Total assets.........................$4,399 $4,417 $ (18) (0.4)%
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CORE WIRELESS SERVICES
Six months
ended
June 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 2,384 $ 2,266 $ 118 5.2%
EBIT................................. 497 387 110 28.4%
EBIT excluding gain on SmarTone...... 394 387 7 1.7%
EBITDA............................... 937 786 151 19.1%
EBITDA excluding gain on SmarTone.... 834 786 48 6.0%
OTHER ITEMS
Capital additions....................$ 214 $ 340 $ (126) (37.3)%
At June 30, At Dec. 31, Change
1998 1997 $ %
Total assets.........................$13,627 $14,123 $ (496) (3.8)%
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OTHER AND CORPORATE
Other and corporate includes TCG, AT&T Solutions, international operations and
ventures, on-line services such as AT&T WorldNet, other businesses, and
corporate operations.
Six months
ended
June 30, Change
$ in millions 1998 1997 $ %
Revenue................................$ 1,549 $ 1,199 $ 350 29.1%
EBIT................................... (3,597) (1,275) (2,322) (182.0)%
EBIT, excluding certain gains,
charges and reserve reversal......... (920) (1,375) 455 33.1 %
EBITDA................................. (3,277) (1,021) (2,256) (220.6)%
EBITDA, excluding certain gains,
charges and reserve reversal.........$ (600) $(1,121) $ 521 46.4%
OTHER ITEMS
Capital additions......................$ 639 $ 709 $ (70) (9.7)%
At June 30, At Dec. 31, Change
1998 1997 $ %
Total assets...........................$ 20,147 $18,501 $ 1,646 8.9%
REVENUE
For the six months ended June 30, 1998, other and corporate revenue increased
$350 million, or 29.1%, compared to the same period of 1997. The revenue growth
in the first half of 1998 compared to the same period in 1997 was primarily due
to increases in TCG, AT&T Solutions, AT&T WorldNet and international operations
and ventures, partially offset by a decrease in revenue from AT&T Solutions
Customer Care.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
EBIT/EBITDA
The following discussion excludes the impact of the 1998 restructuring and
other charges, the 1998 gains on the sales of LIN-TV and AT&T Solutions
Customer Care as well as the first quarter 1997 reversal of pre-1995
restructuring reserves.
EBIT and EBITDA improved by $455 million, or 33.1%, and $521 million, or 46.4%,
respectively in the first six months of 1998 compared to the six months ended
June 30, 1997. The improvements for the six months ended June 30, 1998, compared
to the same period in 1997, were primarily due to an improvement at
international operations, increased interest income on temporary cash
investments, improvements at both AT&T Solutions and AT&T WorldNet, and
reductions in corporate overhead.
ELIMINATIONS
Eliminations reflects the elimination of revenue and profit generated by the
sale of services between business segments. The sale of business long-distance
services to other AT&T units generates nearly all of the eliminated revenue.
Revenue eliminations for the six months ended June 30, 1998 were negative $640
million. EBIT and EBITDA were both negative $11 million for the six months ended
June 30, 1998.
SUPPLEMENTAL DISCLOSURES
LOCAL SERVICES
Local services for business and residential customers are included as part of
AT&T's business services, consumer services, and other and corporate segments.
Other and corporate includes TCG's local business and the costs associated with
corporate staff dedicated to AT&T's local services effort.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Six months
ended
June 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 435 $ 225 $ 210 93.3%
EBIT................................. (1,034) (404) (630) (155.7)%
EBIT excluding asset impairment
charge............................ (433) (404) (29) (7.2)%
EBITDA............................... (878) (312) (566) (181.2)%
EBITDA excluding asset impairment
charge............................ (277) (312) 35 11.1%
OTHER ITEMS
Capital additions....................$ 636 $ 445 $ 191 42.9%
At June 30, At Dec. 31, Change
1998 1997 $ %
Total assets.........................$ 3,770 $4,068 $(298) (7.3)%
REVENUE
For the first six months of 1998, revenue increased to $435 million, up from
$225 million in the same period of last year. The increase was primarily due to
revenue growth for switched services. The increased revenue was also a result of
increased market penetration, primarily in existing markets, as well as
expansion into new markets.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
EBIT/EBITDA
The following discussion excludes the impact of the first quarter 1998 asset
impairment charge.
EBIT was negative $433 million for the six months ended June 30, 1998. This is a
decrease of 7.2% from negative $404 million for the same period of 1997. This
decline is mainly due to an increase in depreciation and amortization expenses
primarily a result of the expansion of local communications networks and
increased investment in AT&T Digital Link. EBITDA improved 11.1% to negative
$277 million for the six months ended June 30, 1998 from negative $312 million
for the same period of 1997. This improvement was primarily due to increased
efficiency associated with the network and the company's decision not to pursue
the sale of local on a TSR basis.
OTHER ITEMS
Capital additions were $636 million for the six month period ended June 30,
1998, compared to $445 million in the same period last year. Capital spending
for local services was primarily related to TCG's expansion, development and
construction of its networks, the acquisition and deployment of switches and the
expansion of operating support systems.
Total assets were $3,770 million at June 30, 1998, a decrease of $298 million,
or 7.3%, compared to $4,068 million at December 31, 1997. The decrease is due
primarily to the first quarter write-down of software.
NEW WIRELESS SERVICES BUSINESSES
Information related to AT&T's new wireless services businesses is included in
the wireless services' segment discussion.
AT&T SOLUTIONS
AT&T Solutions is comprised of AT&T's outsourcing, network integration and
multi-media call center businesses. (The results of AT&T Solutions are included
in other and corporate.)
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Six months
ended
June 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 459 $ 342 $ 117 34.0%
EBIT................................. (13) (103) 90 87.4%
EBITDA............................... 56 (29) 85 289.1%
OTHER ITEMS
Capital additions....................$ 50 $ 37 $ 13 35.4%
At June 30, At Dec. 31, Change
1998 1997 $ %
Total assets.........................$ 549 $ 576 $ (27) (4.7)%
REVENUE
For the six months ended June 30, 1998, revenue grew 34.0% to $459 million.
Revenue growth is due primarily to the outsourcing business. The unit currently
has more than $3 billion under contract with such clients as United Healthcare,
Textron, J.P. Morgan, Merrill Lynch, and MasterCard International. AT&T
Solutions manages AT&T's internal network infrastructure, an operation which,
while not included in the unit's revenue, provides information technology
services and generated internal billings of $780 million for the first six
months of 1998.
EBIT/EBITDA
For the six months ended June 30, 1998, EBIT was a negative $13 million. This is
an improvement of 87.4% from negative $103 million for the same period in 1997.
For the six months ended June 30, 1998, EBITDA was $56 million. This is an
increase of 289.1% from negative $29 million for the same period of 1997. The
increases in both EBIT and EBITDA are due to revenue growth and improvements in
cost structure. AT&T Solutions remains on target to turn profitable by the end
of 1998.
OTHER ITEMS
Total assets were $549 million at June 30, 1998, compared to $576 million at
December 31, 1997. Approximately 50% of total assets in the first six months of
1998 were related to servicing the internal network infrastructure of AT&T.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
WORLDNET AND OTHER ON-LINE SERVICES
WorldNet and other on-line services includes AT&T WorldNet Internet access
service for residential and business consumers (included in other and corporate)
as well as web site hosting and other electronic commerce services (included in
business services).
Six months
ended
June 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 162 $ 91 $ 71 77.8%
EBIT................................. (224) (311) 87 27.9%
EBITDA............................... (199) (297) 98 33.2%
OTHER ITEMS
Capital additions....................$ 19 $ 27 $ (8) (29.9)%
At June 30, At Dec. 31, Change
1998 1997 $ %
Total assets.........................$ 359 $ 334 $ 25 7.4%
REVENUE
For the six months ended June 30, 1998, revenue was $162 million. This is an
increase of 77.8% compared to the $91 million in revenue for the six months
ended June 30, 1997. The increase was due primarily to continued growth in AT&T
WorldNet's residential subscriber base and the expiration of AT&T WorldNet's
free-pricing promotion that was offered in 1997. WorldNet subscribers were 1.095
million at June 30, 1998, up from .923 million at June 30, 1997. This is an
increase of 18.6% compared to the prior year. Average revenue per customer
continues to increase due to the expiration of AT&T WorldNet's initial
promotional price programs in favor of regular monthly rates of $9.95 and
$19.95. AT&T Web Site Services has approximately 9 thousand hosted sites at the
end of the second quarter of 1998 compared with approximately 4 thousand at the
end of the second quarter of 1997.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
AT&T continues to explore new ways of growing its internet access business,
primarily through AT&T WorldNet and other on-line businesses. In the first
quarter of this year AT&T announced a long-distance offer targeting internet
access customers. Also, beginning in the first quarter, AT&T WorldNet customers
were able to sign up for long-distance services via AT&T's web site and receive
a rate of nine cents per minute. The second quarter was highlighted by AT&T's
cross-marketing agreements with top Internet search engines Lycos, Excite,
Yahoo! and Infoseek. Visitors to each of these sites can now make on-line
purchases of AT&T services. These sites will also offer AT&T's new
IP-communications applications such as anonymous voice chat and click-to-dial
directories. The first of these services, AT&T Chat-n-Talk and AT&T
Click-2-Dialsm, were introduced in June. AT&T also announced an agreement with
Checkfree that will enable AT&T customers to view and pay their communications
bills on the Internet.
EBIT/EBITDA
EBIT was negative $224 million for the six months ended June 30, 1998, an
improvement of 27.9% from negative $311 million in the same period of 1997.
EBITDA improved 33.2% to negative $199 million for the six months ended June 30,
1998 from negative $297 million for the same period in 1997. The improvements in
both EBIT and EBITDA were primarily due to revenue growth and cost efficiencies
in AT&T WorldNet.
INTERNATIONAL OPERATIONS AND VENTURES
International operations and ventures includes AT&T's consolidated foreign
operations, the Company's transit and reorigination businesses, on-line services
in the Asia/Pacific region, as well as the equity earnings/losses of AT&T's
non-consolidated joint ventures. International operations and ventures does not
include bilateral international long-distance traffic. (The results of
international operations and ventures are included in other and corporate.)
Six months
ended
June 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 380 $ 316 $ 64 20.4%
EBIT................................. (121) (261) 140 53.6%
EBITDA............................... (88) (228) 140 61.6%
OTHER ITEMS
Capital additions....................$ 49 $ 308 $(259) (84.2)%
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
At June 30, At Dec. 31, Change
1998 1997 $ %
Total assets.........................$1,536 $1,837 $(301) (16.4)%
REVENUE
Revenue for the six months ended June 30, 1998 increased 20.4% to $380 million
compared to $316 million for the same period last year. This increase was driven
by growth in AT&T Communications Services UK and reorigination, partially offset
by declines in certain non-strategic businesses, some of which were exited since
the second quarter of 1997. For the six month period ended June 30, 1998,
revenue from continuing strategic international operations grew 60.5% compared
to the same period in 1997.
EBIT/EBITDA
For the six months ended June 30, 1998, EBIT was negative $121 million, an
improvement of 53.6% from negative $261 million in the same period in 1997.
EBITDA improved 61.6% to negative $88 million for the first six months of 1998
compared to negative $228 million in the first six months of 1997. The
improvements were primarily due to increased revenue, the continued exiting of
non-strategic businesses and decreased equity losses on unconsolidated
operations.
Management is currently assessing the impact, of the announcement regarding the
joint venture to be formed with British Telecommunications PLC (BT), on
international operations and ventures.
OTHER ITEMS
Total assets were $1,536 million at June 30, 1998, compared to $1,837 million at
December 31, 1997. The decrease is due primarily to a decrease in cash.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
JUNE 30, 1998 VERSUS DECEMBER 31, 1997
June 30, December 31, Change
$ in millions 1998 1997 $ %
Total assets.........................$60,973 $61,095 $ (122) (0.2)%
Total assets-continuing operations...$60,973 $59,994 $ 979 1.6%
Total assets decreased $122 million, or 0.2%, primarily due to our efforts to
divest non-strategic assets partially offset by increases in our local
communications network. These efforts generated declines in other and long-term
receivables, net assets from discontinued operations, and investments, offset by
increases in cash and other assets. The decrease in other and long-term
receivables is due primarily to repayment of loans by UCS as part of the
settlement for our April 2, 1998 sale to Citicorp. The decrease in net assets
from discontinued operations also reflects the sale of UCS. The decline in
investments is primarily due to the sales of LIN-TV and SmarTone. The increase
in cash is mainly due to cash received from Citibank in the second quarter 1998
related to the sale of UCS. The increase in other assets is primarily due to
goodwill associated with our purchase of ACC Corp. (ACC). In addition, decreases
in property, plant and equipment due to the local asset impairment charge and
the sale of AT&T Solutions Customer Care were offset by increases in our local
communications network.
Total liabilities decreased $2,111 million, or 5.6%, primarily due to declines
in debt, deferred income taxes, payroll and benefit liabilities, and accounts
payable, partially offset by increases in long-term benefit-related liabilities
and other current liabilities. The decreases in both short-term and long-term
debt reflect the paydown of debt with the proceeds from the sales of UCS, LIN-TV
and AT&T Solutions Customer Care. The decrease in deferred income taxes
primarily reflects the impact of the restructuring and other charges.
The decline in payroll and benefit related liabilities primarily reflects annual
first quarter payout of employee bonuses and the reversal of a portion of the
1995 business restructuring reserve. The decline in accounts payable is
primarily due to a decrease in payables associated with our high year-end
capital expenditures. The increase in long-term benefit-related liabilities is
primarily due to the second quarter charges associated with the voluntary
retirement incentive program for management employees. The charge for pension
special termination benefits and other costs resulted in the establishment of a
liability for the Management Pension Plan. The increase in other current
liabilities is mainly due to an increase in accrued income taxes primarily
associated with the sale of UCS.
Total shareowners' equity increased $1,989 million, or 8.4%, primarily due to
current year's net income and shares issued to acquire ACC partially offset by
dividends declared.
The ratio of total debt to total capital, (defined as debt divided by total
capital) at June 30, 1998, was 24.5% compared to 33.5% at December 31, 1997. The
decrease was primarily the result of lower debt. If AT&T used its available cash
to retire the outstanding debt, there would $491 million debt remaining at June
30, 1998.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998, VERSUS SIX MONTHS ENDED JUNE 30, 1997
Cash flows provided by operating activities of continuing operations for the six
months ended June 30, 1998, were $3,913 million. This represents an increase of
$1,133 million compared to the first six months of 1997. The increase in
operating cash flow was driven primarily by a $1,077 million increase in income
from continuing operations excluding the restructuring and other
charges and the gains on sales which have essentially no impact on operating
cash flows.
For the six months ended June 30, 1998, cash provided by investing activities of
$8,547 million increased $10,486 million from a $1,939 million use of cash for
the six months ended June 30, 1997 due primarily to the UCS sale on April 2,
1998, for which we received $5,722 million in settlement of receivables as well
as $3,500 million in proceeds from the sale. Additionally, in 1998 we received
$742 million, $625 million and $183 million from the sales of LIN-TV, AT&T
Solutions Customer Care and SmarTone, respectively.
Net cash used in financing activities of $5,025 million increased $4,106 million
from $919 million for the first six months of 1997. This primarily reflects the
use of cash received from 1998 asset dispositions to paydown commercial paper.
In July 1998, AT&T's Board of Directors authorized an open market share
repurchase program to repurchase up to $3 billion of AT&T common stock. We began
repurchasing shares in the third quarter of 1998 and intend to reissue the
repurchased shares as part of the shares to be issued in connection with the TCI
merger.
In August 1998, AT&T extinguished approximately $1 billion of debt. This early
extinguishment of debt resulted in an after-tax charge of $137 million and was
recorded as an extraordinary loss.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RECENT PRONOUNCEMENTS
Beginning with the 1998 annual report we will adopt Statement of Financial
Accounting Standards (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 revenues or holds assets, and
major customers.
In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 132, "Employers' Disclosure about Pensions and Other Postretirement
Benefits." Among other provisions, it standardizes certain disclosure
requirements for pension and other postretirement benefits, requires additional
information on changes in the benefit obligations and fair values of plan
assets, and eliminates certain other disclosures. The standard is effective for
fiscal years beginning after December 15, 1997. For AT&T this means that the
standard is effective for the 1998 annual report. Since the standard applies
only to the presentation of pension and other postretirement benefit
information, it will not have any impact on AT&T's results of operations,
financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Among other provisions, the SOP
requires that entities capitalize certain internal-use software costs once
certain criteria are met. The SOP is effective for financial statements for
fiscal years beginning after December 15, 1998, though early adoption is
encouraged. For AT&T this means that it must be adopted no later than January 1,
1999. If AT&T elects to adopt the SOP earlier than the effective date,
restatement of interim periods during the year of adoption is required.
Management is currently assessing the impact on AT&T's consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Among other provisions, it requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Gains and losses resulting from changes in the fair values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. This standard is effective for fiscal years
beginning after June 15, 1999, though earlier adoption is encouraged and
retroactive application is prohibited. For AT&T this means that the standard
must be adopted no later than January 1, 2000. Management does not expect the
adoption of this standard to have a material impact on AT&T's results of
operations, financial position or cash flows.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OTHER DEVELOPMENTS
On July 23, 1998, AT&T completed the merger with TCG, pursuant to an agreement
and plan of merger dated January 8, 1998. Each share of TCG common stock was
exchanged for 0.943 of AT&T common stock resulting in the issuance of
approximately 181.6 million shares in the transaction. The merger was accounted
for as a pooling of interests.
On March 3, 1998, AT&T agreed to sell WOOD-TV, its television station in Grand
Rapids, Michigan, for approximately $123 million, subject to certain
adjustments, which is expected to close in the fourth quarter of 1998.
On June 24, 1998, AT&T signed a definitive merger agreement with TCI for an
all-stock transaction valued at approximately $48 billion. Under the agreement,
AT&T will issue 0.7757 shares of AT&T common stock for each share of TCI Group
Series A common stock and 0.8533 shares of AT&T common stock for each share of
TCI Group Series B stock. The transaction, which is subject to regulatory,
shareowner and other approvals, is expected to be completed in the first half of
1999. Also announced was TCI's intention to combine Liberty Media Group, its
programming arm, and TCI Ventures Group, its technology investments unit, to
form the new Liberty Media Group. Upon closing of the AT&T/TCI merger, the
shareowners of the new Liberty Media Group will be issued separate tracking
stock by AT&T in exchange for the shares currently held in Liberty Media Group
and TCI Ventures Group.
AT&T and BT announced on July 26, 1998 that they will create a global venture to
serve the complete communications needs of multinational companies and the
international calling needs of individuals and businesses around the world. The
venture, which will be owned equally by AT&T and BT, will combine trans-border
assets and operations of each company, including their existing international
networks, all of their international traffic, all of their border products for
business customers - including an expanding set of Concert services - and AT&T
and BT's multinational accounts in selected industry sectors. The formation of
the venture is subject to certain conditions, including receipt of regulatory
approvals and the purchase by BT of MCI Communication Corporation's interest in
Concert and the final negotiation and execution of definitive documents. The
transaction is expected to be completed within 12 months. Based on the merger
agreement, AT&T may be required to exit certain operations which compete
directly with BT. A full review is currently underway to determine the size and
scope of any international restructurings. Management expects to have definitive
plans in place by the end of 1998, and accordingly, a restructuring charge
associated with this review will be forthcoming.
In August of 1998, AT&T extinguished approximately $1 billion of debt. The early
extinguishment of debt resulted in an after-tax charge of $137 million and has
been recorded as an extraordinary loss.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
FORWARD LOOKING STATEMENTS
Except for the historical statements and discussions contained herein,
statements contained in this Report on Form 8-K 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, 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.
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. Readers should also
consider the factors discussed under the headings "Results of Operations" and
"Financial Condition" included in this Form 8-K. 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>
Form 8-K AT&T Corp.
October 16, 1998
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
For the Six
Months Ended
June 30,
1998 1997
Revenues................................... $26,042 $25,584
Operating Expenses
Access and other interconnection........... 7,830 8,513
Network and other
communications services................... 4,753 4,612
Depreciation and amortization ............. 2,194 1,908
Selling, general and administrative ....... 7,089 7,453
Restructuring and other charges............ 3,344 -
Total operating expenses .................. 25,210 22,486
Operating income........................... 832 3,098
Other income - net ........................ 1,013 239
Interest expense .......................... 208 166
Income from continuing operations
before income taxes ...................... 1,637 3,171
Provision for income taxes ................ 582 1,251
Income from continuing operations ......... 1,055 1,920
Income from discontinued operations
(net of taxes of $6 and $43).............. 10 69
Gain on sale of discontinued operation
(net of tax of $799) ..................... 1,290 -
Net income ................................ $ 2,355 $ 1,989
Weighted average common shares and
potential common shares (millions)*....... 1,813 1,783
Per common share - basic:
Income from continuing operations ........ $ 0.59 $ 1.08
Income from discontinued operations....... 0.01 0.04
Gain on sale of discontinued operation.... 0.71 -
Net income ............................... $ 1.31 $ 1.12
Per common share - diluted:
Income from continuing operations ........ $ 0.58 $ 1.08
Income from discontinued operations....... 0.01 0.04
Gain on sale of discontinued operation.... 0.71 -
Net income ............................... $ 1.30 $ 1.12
Dividends declared per common share........ $ 0.66 $ 0.66
*Amounts represent the weighted-average shares assuming dilution from the
potential exercise of stock options. Amounts are reduced by 16 and 7 million for
the six month periods ended June 30, 1998, and 1997, respectively, assuming no
dilution.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions Except Share Amounts)
(Unaudited)
June 30, December 31,
1998 1997
ASSETS
Cash and cash equivalents .............. $ 7,845 $ 318
Marketable securities................... 123 307
Receivables less allowances
of $1,044 and $988
Accounts receivable................... 8,850 8,675
Other receivables..................... 404 5,684
Deferred income taxes................... 1,440 1,252
Other current assets.................... 517 541
Total current assets.................... 19,179 16,777
Property, plant and equipment, net
of accumulated depreciation of
$23,815 and $22,233 .................. 24,244 24,203
Licensing costs, net of accumulated
amortization of $1,168 and $1,076..... 8,272 8,368
Investments............................. 3,221 3,866
Long-term receivables................... 671 1,794
Prepaid pension costs................... 1,942 2,156
Other assets............................ 3,444 2,830
Net assets of discontinued operation.... - 1,101
TOTAL ASSETS............................ $60,973 $61,095
(CONT'D)
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
CONSOLIDATED BALANCE SHEETS (CONT'D)
(Dollars in Millions Except Share Amounts)
(Unaudited)
June 30, December 31,
1998 1997
LIABILITIES
Accounts payable....................... $ 6,009 $ 6,402
Payroll and benefit-related
liabilities.......................... 1,623 2,390
Debt maturing within one year.......... 1,175 4,085
Dividends payable...................... 538 538
Other current liabilities.............. 5,380 3,902
Total current liabilities.............. 14,725 17,317
Long-term debt......................... 7,161 7,857
Long-term benefit-related liabilities.. 5,419 3,142
Deferred income taxes.................. 4,662 5,711
Other long-term liabilities and
deferred credits..................... 3,339 3,390
Total liabilities ..................... 35,306 37,417
SHAREOWNERS' EQUITY
Common shares - par value $1 per share. 1,806 1,789
Authorized shares: 6,000,000,000
Outstanding shares:
1,806,071,000 at June 30, 1998;
1,789,013,000 at December 31, 1997
Additional paid-in capital............. 18,063 17,121
Guaranteed ESOP obligation............. (58) (70)
Retained earnings...................... 5,905 4,876
Accumulated other comprehensive
income............................... (49) (38)
Total shareowners' equity.............. 25,667 23,678
TOTAL LIABILITIES & SHAREOWNERS' EQUITY $60,973 $61,095
See Notes to Consolidated Financial Statements.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(Dollars in Millions)
(Unaudited)
For the Six Months Ended
June 30,
1998 1997
Common Shares
Balance at beginning of year............... $ 1,789 $ 1,774
Shares issued, net:
Under employee plans..................... 2 2
Under shareowner plans................... - -
For acquisitions......................... 15 5
Balance at end of period................. 1,806 1,781
Additional Paid-In Capital
Balance at beginning of year............... 17,121 16,624
Shares issued(acquired), net:
Under employee plans..................... 52 55
Under shareowner plans................... - 9
For acquisitions......................... 807 89
Other.................................... 83 18
Balance at end of period..................... 18,063 16,795
Guaranteed ESOP Obligation
Balance at beginning of year............... (70) (96)
Amortization............................... 12 13
Balance at end of period..................... (58) (83)
Retained Earnings
Balance at beginning of year............... 4,876 2,790
Net income................................. 2,355 $2,355 1,989 $1,989
Dividends declared......................... (1,072) (1,073)
Treasury shares issued at less than cost... (257) (52)
Other changes.............................. 3 4
Balance at end of period..................... 5,905 3,658
Accumulated Other Comprehensive Income
Balance at beginning of year............... (38) -
Other Comprehensive Income
(net of taxes of ($49) and ($8)) ........ (11) (11) (38) (38)
Total Comprehensive Income................. $2,344 $1,951
Balance at end of period..................... (49) (38)
Total Shareowners' Equity.................... $25,667 $22,113
See Notes to Consolidated Financial Statements.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
For the Six
Months Ended
June 30,
1998 1997
Operating Activities
Net income ............................... $ 2,355 $ 1,989
Deduct: Income from discontinued
operations ..................... 10 69
Gain on sale of discontinued
operation....................... 1,290 -
Income from continuing operations ........ 1,055 1,920
Adjustments to reconcile net income to
net cash provided by operating
activities of continuing operations:
Restructuring and other charges........ 3,344 -
Gains on sales......................... (770) (97)
Depreciation and amortization.......... 2,194 1,908
Provision for uncollectibles........... 714 812
Increase in accounts receivable........ (872) (437)
Increase(decrease) in accounts payable. 131 (124)
Net increase in other operating
assets and liabilities............... (666) (1,350)
Other adjustments for noncash
items - net.......................... (1,217) 148
Net cash provided by operating
activities of continuing operations..... 3,913 2,780
Investing Activities
Capital expenditures.................... (3,289) (3,147)
Proceeds from sale or disposal of
property, plant and equipment......... 45 48
Decrease in other receivables........... 6,404 923
Acquisitions of licenses................ (55) (291)
Decrease in marketable securities....... 184 79
Net decrease(increase) in investments... 1,144 (154)
Proceeds from dispositions.............. 4,172 657
Other investing activities - net........ (58) (54)
Net cash provided by(used in) investing
activities of continuing operations..... 8,547 (1,939)
(CONT'D)
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(Dollars in Millions)
(Unaudited)
For the Six
Months Ended
June 30,
1998 1997
Financing Activities
Proceeds from long-term debt issuance.. 2 2
Retirements of long-term debt.......... (729) (472)
Acquisition of common shares - net..... (215) 28
Dividends paid......................... (1,072) (1,070)
Decrease in short-term
borrowings - net..................... (3,027) 562
Other financing activities - net....... 16 31
Net cash used in financing activities
of continuing operations............... (5,025) (919)
Net cash provided by
discontinued operations................ 92 11
Net increase(decrease) in cash and
cash equivalents....................... 7,527 (67)
Cash and cash equivalents
at beginning of year................... 318 196
Cash and cash equivalents
at end of period....................... $ 7,845 $ 129
See Notes to Consolidated Financial Statements.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
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, 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.
(b) RESTRUCTURING AND OTHER CHARGES
During the first quarter AT&T recorded a pre-tax charge of $601
related to the Company's decision not to pursue Total Service
Resale (TSR) as a local service strategy. The Company's in-market
experiences and results have proven that the TSR solution is not
economically viable for the short-term or the long-term. The
pre-tax charge includes a $543 write-down of software, $42
primarily related to equipment associated with the software
platform and $16 for the termination of certain contracts.
AT&T continues its financial and operational review of the various
alternatives for entering the local market, including the impacts
associated with the merger with Teleport Communications Group,
Inc. (TCG) and the pending merger with Tele-Communications, Inc.
(TCI). In addition, certain fixed assets which were purchased as
part of the TSR initiative may also be impaired. These assets are
currently being evaluated in conjunction with the TCG merger to
determine if any assets are impaired. Management expects to
complete this review by the end of the fourth quarter.
During the second quarter 1998 AT&T recorded restructuring charges
of $2,743 primarily in connection with a plan, announced on
January 26, 1998, to reduce headcount by 15,000 to 18,000 over two
years as part of the Company's overall cost reduction program. In
connection with this plan, a voluntary retirement incentive
program (VRIP) was offered to eligible management employees.
Approximately 15,300 management employees accepted the VRIP offer.
The restructuring charges of $2,743 include a pre-tax charge of
$2,724 comprised of $2,412 for pension special termination
benefits and other costs and $312 for postretirement special
termination benefits and curtailment losses. This amount will be
partially offset by approximately $1.1 billion of gains to be
recognized in the third and fourth quarters of this year as
employees' pension benefit obligations are settled. The amount of
gains to be recognized in future periods is subject to market
fluctuations. Due to the capital market downturn and the lowering
of the discount rate, as of the beginning of October, we estimate
that the gains will be $0.7 billion.
The restructuring charges of $2,743 also include pre-tax charges
of $125 for related facility costs and $150 for executive
separation costs. The second quarter charges were partially offset
by the reversal of $256 (pre-tax) of 1995 business restructuring
reserves resulting from the overlap of the VRIP acceptance rate on
certain 1995 projects.
The after-tax impact to earnings for the first and second quarter
charges for the six months ended June 30, 1998 was $2,065, or a
reduction of $1.14 per diluted share. As of the beginning of
October, the pension settlement gains to be recognized in the
third and fourth quarters are
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
estimated to be a total of approximately $0.35 per share which
would reduce the year-to-date charges to a net charge of
approximately $0.79 per diluted share for the year.
(c) 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 AT&T's
submarine systems business (SSI), which was sold to Tyco
International Ltd. on July 1, 1997 for approximately $850, and the
sale of AT&T Universal Card Services, Inc. (UCS), which was sold
to Citibank on April 2, 1998 for $3,500, as discontinued
operations. The after-tax gain resulting from the disposal of UCS
was $1,290, or $0.71 per share. Included in the sale was the
signing of a co-branding and joint marketing agreement.
Accordingly, the revenues, costs and expenses, assets and
liabilities, and cash flows of SSI and UCS 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 from discontinued operations," net of
applicable income taxes; as "Net assets of discontinued
operations"; and as "Net cash provided by discontinued
operations."
Summarized financial information for discontinued operations is as
follows:
For the Six
Months Ended
June 30,
1998 1997
Revenues $ 365 $1,188
Income before
income taxes 16 112
Net income $ 10 $ 69
At June At December
30, 1998 31, 1997
Current assets $ - $7,734
Total assets - 7,808
Current liabilities* - 5,602
Total liabilities* - 6,707
Net assets of discontinued
operations $ - $1,101
*Current liabilities include $5,224 of debt maturing within one year
and total liabilities include an additional $1,093 of long-term debt
at December 31, 1997, both of which were payable to AT&T. On April 2,
1998, we received $5,722 as settlement of these receivables from UCS.
No interest expense was allocated to discontinued operations in 1998
or 1997 due to the immateriality of the amounts; however, UCS
recorded
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
direct interest expense of $85 and $141 for the six month periods
ended June 30, 1998, and 1997, respectively.
(d) RECLASSIFICATION
We have reclassified certain prior period amounts to conform with
our current presentation.
(e) TELEPORT COMMUNICATIONS GROUP, INC. MERGER
On July 23, 1998, AT&T completed the merger with TCG, pursuant to
an agreement and plan of merger dated January 8, 1998. Each share
of TCG common stock was exchanged for 0.943 of AT&T common stock
resulting in the issuance of 181.6 million shares in the
transaction. The merger was accounted for as a pooling of
interests, and accordingly, AT&T's results of operations,
financial position and cash flows have been restated to reflect
the merger.
(f) TELE-COMMUNICATIONS, INC. ACQUISITION
On June 24, 1998, AT&T signed a definitive merger agreement with
TCI for an all-stock transaction. Under the agreement, AT&T will
issue 0.7757 shares of AT&T common stock for each share of TCI
Group Series A common stock and 0.8533 shares of AT&T common stock
for each share of TCI Group Series B stock. The transaction, which
is subject to regulatory, shareowner and other approvals, is
expected to be completed in the first half of 1999. Also
announced was TCI's intention to combine Liberty Media Group,
its programming arm, and TCI Ventures Group, its technology
investments unit, to form the new Liberty Media Group. Upon
closing of the AT&T/TCI merger, the shareowners of the new Liberty
Media Group will be issued separate tracking stock by AT&T in
exchange for the shares currently held in Liberty Media Group and
TCI Ventures Group.
(g) JOINT VENTURE WITH BRITISH TELECOMMUNICATIONS PLC (BT)
AT&T and BT announced on July 26, 1998 that they will create a
global venture to serve the complete communications needs of
multinational companies and the international calling needs of
individuals and businesses around the world. The venture, which
will be owned equally by AT&T and BT, will combine trans-border
assets and operations of each company, including their existing
international networks, all of their international traffic, all
of their trans-border products for business customers --
including an expanding set of Concert services -- and AT&T and
BT's multinational accounts in selected industry sectors. The
formation of the venture is subject to certain conditions,
including receipt of regulatory approvals and the purchase by BT
of MCI Communication Corporation's interest in Concert and the
final negotiation and execution of definitive documents. The
transaction is expected to be completed within 12 months. Based
on the merger agreement, AT&T may be required to exit certain
operations which compete directly with BT. A full review is
currently underway to determine the size and scope of any
international restructurings. Management expects to have
definitive plans in place by the end of 1998, and accordingly, a
restructuring charge associated with this review will be
forthcoming.
(h) EXTRAORDINARY LOSS
In August 1998, AT&T extinguished approximately $1 billion of
debt. This early extinguishment of debt resulted in an after-tax
charge to AT&T of $137 and was recorded as an extraordinary loss.
Exhibit 99.2
AT&T Quarterly Consolidated Statements of Income
(Dollars in millions except per share amounts)
(Unaudited)
For the three months ended
Mar. 31 June 30 Mar. 31 June 30 Sept. 30 Dec. 31
1998 1998 1997 1997 1997 1997
REVENUES
Business services $ 5,673 $ 5,700 $ 5,428 $ 5,556 $ 5,561 $ 5,485
Consumer services 5,628 5,655 5,928 5,873 5,977 5,749
Wireless services* 1,164 1,313 1,092 1,179 1,190 1,207
Other and corporate 718 831 557 642 692 813
Eliminations (352) (288) (317) (354) (330) (351)
Total revenues 12,831 13,211 12,688 12,896 13,090 12,903
OPERATING EXPENSES
Access and other interconnection 3,936 3,894 4,266 4,247 3,975 3,862
Network and other communications
services 2,388 2,365 2,233 2,379 2,455 2,345
Depreciation and amortization 1,065 1,129 960 948 1,019 1,055
Selling, general and
administrative 3,487 3,602 3,613 3,840 3,894 3,650
Restructuring and other charges 601 2,743 - - - -
Total operating expenses 11,477 13,733 11,072 11,414 11,343 10,912
Operating income(loss) 1,354 (522) 1,616 1,482 1,747 1,991
Other income - net 706 307 176 63 132 72
Interest expense 80 128 81 85 75 66
Income(loss) from continuing
operations before income taxes 1,980 (343) 1,711 1,460 1,804 1,997
Provision for income taxes 726 (144) 668 583 726 746
Income(loss) from continuing
operations 1,254 (199) 1,043 877 1,078 1,251
Income from discontinued
operations (net of taxes of
$6, $0, $25, $18, $6, and $1) 10 - 38 31 20 11
Gain on sale of discontinued
operations (net of taxes
of $799 and $43) - 1,290 - - 66 -
NET INCOME $ 1,264 $ 1,091 $ 1,081 $ 908 $ 1,164 1,262
Weighted average common shares
and potential common shares
(millions)** 1,806 1,805 1,782 1,784 1,787 1,801
<PAGE>
Form 8-K
October 16, 1998
PER COMMON SHARE (BASIC):
Income(loss) from continuing
operations $ 0.70 $ (0.11)$ 0.59 $ 0.49 $ 0.60 $ 0.70
Income from discontinued
operations .01 - 0.02 0.02 0.01 0.01
Gain on sale of discontinued
operations - 0.71 - - 0.04 -
NET INCOME $ 0.71 $ 0.60 $ 0.61 $ 0.51 $ 0.65 $ 0.71
PER COMMON SHARE (DILUTED):
Income(loss) from continuing
operations $ 0.69 $ (0.11)$ 0.59 $ 0.49 $ 0.60 $ 0.69
Income from discontinued
operations .01 - 0.02 0.02 0.01 0.01
Gain on sale of discontinued
operations - 0.71 - - 0.04 -
NET INCOME $ 0.70 $ 0.60 $ 0.61 $ 0.51 $ 0.65 $ 0.70
Dividends declared per
common share $ 0.33 $ 0.33 $ 0.33 $ 0.33 $ 0.33 $ 0.33
* Wireless services revenues reflect a reclass for inroaming revenues which were
previously netted against expense. Based on AT&T's current accounting
policies, the previous accounting was inappropriate. Accordingly, revenues now
reflect the amounts billed to customers with the corresponding expense
included in network and other communications services expenses. Inroaming
revenues were $52 million, $69 million, $52 million, $63 million, $66 million
and $51 million for the three month periods ended March 31, 1998, June 30,
1998, March 31, 1997, June 30, 1997, September 30, 1997 and December 31, 1997,
respectively.
**Amounts represent the weighted-average shares assuming dilution from the
potential exercise of stock options. Amounts are reduced by 18 million, 0, 5
million, 8 million, 2 million and 15 million for the three month periods ended
March 31, 1998, June 30, 1998, March 31, 1997, June 30, 1997, September 30,
1997 and December 31, 1997, respectively.
Exhibit 99.3
Post-Merger Financial Results
AT&T Corp. ("AT&T" or the "Company") is filing a condensed statement of income
for the month ended August 31, 1998 and a condensed balance sheet at August 31,
1998. All figures reflect the merger between AT&T and Teleport Communications
Group, Inc. (TCG) on July 23, 1998, which was accounted for as a pooling of
interests. The income statement data for the month ended August 31, 1998, and
balance sheet data at August 31, 1998, are derived from AT&T's unaudited
consolidated financial statements.
AT&T Corp. and Subsidiaries
Condensed Statement of Income
For the Month Ended
August 31, 1998
(Dollars in Millions)
(except per share amounts)
Total revenue $4,560
Operating expenses 3,575
Operating income 985
Net income before extraordinary loss 619
Extinguishment of debt (net
of taxes of $80) (137)
Net income $ 482
Earnings per share - basic
Net income before extraordinary loss $ 0.34
Extinguishment of debt (0.07)
Net income $ 0.27
Earnings per share - diluted
Net income before extraordinary loss $ 0.34
Extinguishment of debt (0.07)
Net income $ 0.27
<PAGE>
Form 8-K
October 16, 1998
AT&T Corp. and Subsidiaries
Condensed Balance Sheet
August 31, 1998
Current assets $17,622
Other assets 42,185
Total assets $59,807
Current liabilities $14,589
Other liabilities 19,583
Total liabilities 34,172
Total shareowners' equity 25,635
Total liabilities and shareowners' equity $59,807
Because of rules pertaining to pooling of interest accounting, at least 30 days
of post-merger financial results for the combined AT&T and TCG must be published
at this time. It is highly unusual for AT&T to publish a single month's results.
Because this is so unusual, AT&T cautions that fluctuations in monthly results
are not necessarily the same as the trends that would be evident in quarterly
reporting, just as the seasonal variation inherent in quarterly results are not
apparent in annual results.
AT&T believes that, on the whole, August was a good month. Business services
revenue rebounded to the pre-outage level while both wireless services revenue
and local services revenue were consistent with prior trends. Costs and expenses
were down as we continued to drive costs out of the business led by the impact
from the lowered headcount due to the Voluntary Retirement Incentive Plan. In
the month of August, AT&T recognized an extraordinary loss of $137 million (net
of tax) on the early extinguishment of debt.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Shareowners of AT&T Corp:
Our audits of the consolidated financial statements referred to in our report
dated January 26, 1998, except as to Note 15 for which the date is September 23,
1998, appearing on page 4 on this Current Report on Form 8-K of AT&T Corp. and
subsidiaries, also included an audit of the consolidated financial statement
schedule listed in Item 7 of this Current Report on Form 8-K. In our opinion,
this financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York, New York
January 26, 1998
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
Schedule II--Sheet 1
AT&T CORP.
AND ITS CONSOLIDATED SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(Millions of Dollars)
- --------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- --------------------------------------------------------------------------------
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions(a) of Period
- --------------------------------------------------------------------------------
Year 1997
Allowances for doubtful
Accounts (b) $1,000 $1,522 $1,485 $1,037
Reserves related to business
restructuring, including
force and facility
consolidation (c) $1,388 $ - $ 481 $ 907
Deferred tax asset valuation
Allowance (d) $ 220 $ 142 $ 1 $ 361
Year 1996
Allowances for doubtful
Accounts (b) $ 833 $1,518 $1,351 $1,000
Reserves related to business
restructuring, including
force and facility
consolidation (c) $2,092 $ - $ 704 $1,388
Deferred tax asset valuation
Allowance (d) $ 151 $ 71 $ 2 $ 220
The Notes on Sheet 2 are an integral part of this Schedule.
<PAGE>
Form 8-K AT&T Corp.
October 16, 1998
Schedule II--Sheet 2
AT&T CORP.
AND ITS CONSOLIDATED SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(Millions of Dollars)
- --------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- --------------------------------------------------------------------------------
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions(a) of Period
- --------------------------------------------------------------------------------
Year 1995
Allowances for doubtful
Accounts (b) $ 612 $1,125 $ 904 $ 833
Reserves related to business
restructuring, including
force and facility
consolidation (c) $ 699 $1,712 $ 319 $2,092
Deferred tax asset valuation
Allowance (d) $ 45 $ 122 $ 16 $ 151
- ------------
(a) Amounts written off as uncollectible, net of recoveries.
(b) Includes allowances for doubtful accounts on long-term receivables of $49
$52 and $35 in 1997, 1996 and 1995, respectively (included in long-term
receivables in the Consolidated Balance Sheets).
(c) Included primarily in other current liabilities and in other long-term
liabilities and deferred credits in the Consolidated Balance Sheets.
(d) End of period balances include $14, $9 and $10 which represent the
current portion of the deferred tax valuation allowance for 1997, 1996
and 1995, respectively.
