<PAGE>
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: March 2, 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
<PAGE>
Form 8-K AT&T Corp.
March 2, 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. Filed as Exhibit 99 to
this 8-K is the following information:
1. Management's Discussion and Analysis.
2. Seven-Year Summary of Selected Financial Data.
3. Report of Independent Accountants.
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.
Item 7. Financial Statements and Exhibits.
(c) Exhibits.
Exhibit 23 Consent of Coopers & Lybrand L.L.P.
Exhibit 99 AT&T Corp. consolidated financial results and certain other
information for the year ended December 31, 1997.
<PAGE>
Form 8-K AT&T Corp.
March 2, 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
February 27, 1998
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 No. 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. 33-56643, 33-49465 and 33-20276), 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. 33-49089), 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) 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.
COOPERS & LYBRAND L.L.P.
1301 Avenue of the Americas
New York, New York
March 2, 1998
<PAGE>
March 2, 1998 Exhibit 99
1997 Annual Report - Financial Review
AT&T Corp. and Subsidiaries (AT&T)
WHAT IT ALL MEANS:
In reporting our 1997 operating results we employed certain conventions in order
to assist readers in understanding the key drivers of our business. First, in
order to distinguish the performance of AT&T's established businesses from the
dilutive impacts of investments in new business areas, we present certain
information in terms of "core" businesses and "initiatives." Core businesses
include: business and consumer long-distance services, wireless voice services
in existing 850 MHz markets, messaging, air-to-ground services and wireless
product sales. Initiatives include: local service; wireless service in new 1.9
GHz markets; wireless data services; online services such as AT&T WorldNet*; the
AT&T Solutions outsourcing, consulting and networking integration professional
services business, and international markets (excluding bilateral traffic). Note
that all financial data presented on a "core" and "initiatives" basis should be
considered approximate. Data on initiatives include costs and expenses on an
incremental basis and require certain estimates and allocations that management
believes provide a reasonable basis on which to present such information.
Also, as required by generally accepted accounting principles, our financial
statements include only the results of "continuing operations." The results of
certain businesses AT&T has divested and AT&T Universal Card Services, Inc.
(UCS), which in the fourth quarter we agreed to sell to Citicorp (Citibank), are
represented as "Income from discontinued operations" (net of applicable taxes),
"Net assets of discontinued operations," and "Net cash used in discontinued
operations." In 1997 discontinued operations included the results of UCS. The
results of AT&T's former submarine systems business, sold to Tyco International
Ltd. in July, are also included in discontinued operations. In 1996 and 1995
discontinued operations included Lucent Technologies Inc. (Lucent), AT&T Capital
Corporation (AT&T Capital), NCR Corporation (NCR) and other businesses.
Financial Section Index
6 Management's Discussion and Analysis
38 Seven-Year Summary of Selected Financial Data
40 Report of Management
41 Report of Independent Accountants
42 Consolidated Statements of Income
43 Consolidated Balance Sheets
44 Consolidated Statements of Changes in Shareowners' Equity
45 Consolidated Statements of Cash Flows
46 Notes to Consolidated Financial Statements
* (registered trademark of AT&T)
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
<PAGE>
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, and earnings before interest, taxes, depreciation and amortization
(EBITDA), including other income, by over $900 million each and reduced earnings
per share by about $0.37. 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. TCG brings to AT&T local
facilities in 66 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. Under the agreement each share of TCG will be
exchanged for .943 of an AT&T share. The merger, which remains subject to
regulatory approval and certain other conditions, is expected to close in the
second half of 1998.
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 over $1.5 billion, EBITDA by more than $1.2 billion and earnings per
share by about $0.58 for the year.
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<TABLE>
<CAPTION>
A chart appears containing the following information: AT&T Two-year EPS* Trend
+: Core EPS in dollars #: Total EPS in dollars @: Initiatives EPS in dollars
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars 1.20
+
+
+
+
# +
+ +
#
#
#
0.80 +
#
#
#
#
0.40
0
@
@ @
@
@ @
@
@
(0.40)
1Q96 2Q96 3Q96 4Q96 1Q97 2Q97 3Q97 4Q97
Year Core Inits Total
1996 4.04 (0.59) 3.45
1997 3.69 (0.95) 2.74
<FN>
*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.
</FN>
</TABLE>
<PAGE>
We continued to invest in our core long-distance business as well. The AT&T
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.
<TABLE>
<CAPTION>
A chart appears containing the following information:
Number of Calls on the Network
#: Number of calls on the Network.
<S> <C> <C> <C> <C>
80 Billion
#
70
#
#
60
50
40
30
20
10
0
1995 1996 1997
</TABLE>
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
assets and
<PAGE>
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. 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. All told, we expect these
transactions to generate about $6.7 billion in cash for AT&T (pretax). As a
result, our already solid balance sheet will 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, as the chart
below shows. Further, we expect to reduce SG&A by $1.6 billion in 1998 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 voluntary retirement incentive program to
be offered to managers during the second quarter of 1998. The expected
acceptance rate of 10,000 to 11,000 employees for the voluntary retirement
incentive offer may impact the utilization of the remaining 1995 restructuring
reserve balance. Another 5,000 to 7,000 employees will leave through a
combination of managed attrition and previously announced workforce reductions.
<PAGE>
<TABLE>
<CAPTION>
A chart appears containing the following information: AT&T Two-year EBITDA Trend
+: Core EBITDA in dollars #: Total EBITDA in dollars @: Initiatives EBITDA in
dollars AT&T Two-year EBITDA Trend Dollars in Millions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
4,000
+
3,500
+
+
+
+
+
#
#
+
#
#
+
3,000
#
#
#
2,500
#
2,000
1,500
1,000
500
0
@
@
@
@
(500)
@
@
@
@
(1,000)
1Q96 2Q96 3Q96 4Q96 1Q97 2Q97 3Q97 4Q97
</TABLE>
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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.
<TABLE>
<CAPTION>
A chart appears containing the following information:
@: AT&T performance vs DJIA in 1997
#: The DJIA performance in 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
155%
145%
@
135%
125% # @
# # # # #
115% #
# # @
105% # #
@# # @
95%
@ @ @
85%
@ @ @ @ @
75%
65%
12/ 1/ 2/ 3/ 4/ 5/ 6/ 7/ 8/ 9/ 10/ 11/ 12/
31/ 31/ 28/ 31/ 30/ 30/ 30/ 31/ 29/ 30/ 31/ 28/ 31/
96 97 97 97 97 97 97 97 97 97 97 97 97
</TABLE>
<PAGE>
OPERATING RESULTS
Our income from continuing operations decreased $1,101 million, or 19.8%, in
1997 and increased $506 million, or 10.0%, in 1996. Lower earnings from the core
business and increased dilution from investment 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 $7.2 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
pretax charge was recorded as $844 million in network and other communications
services expenses, $934 million in depreciation and amortization expenses, and
$1,245 million in selling, general and administrative expenses. The tax benefit
associated with the charges was $991 million. The total impact on income from
continuing operations was $2,032 million, or $1.28 per share. The impact on
income from discontinued operations was $3,321 million, or $2.08 per share. The
impact on net income was $5,353 million, or $3.36 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 $4,472 $5,573 $5,067
Income from Discontinued Operations 100 173 425
Gain on Sale of Discontinued
Operations 66 162 -
Net Income $4,638 $5,908 $5,492
Earnings Per Share - Diluted:
Income from Continuing Operations $ 2.74 $ 3.45 $ 3.19
Income from Discontinued Operations 0.06 0.11 0.26
Gain on Sale of Discontinued
Operations 0.04 0.10 -
Net Income $ 2.84 $ 3.66 $ 3.45
Earnings Per Share - Diluted:
Core $ 3.69 $ 4.04 $ 3.40
Initiatives (0.95) (0.59) (0.21)
Total Continuing Operations $ 2.74 $ 3.45 $ 3.19
*Excludes restructuring and other charges
<PAGE>
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 is
the only business remaining in discontinued operations. 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
long-distance services, wireless services, local and other initiatives, and
other and eliminations. Total revenues grew $773 million, or 1.5%, in 1997 and
$2,101 million, or 4.3%, in 1996.
Dollars in Millions
For the Years Ended December 31 1997 1996 1995
Business long-distance services $22,212 $21,591 $20,496
Consumer long-distance services 23,962 24,650 24,299
Wireless services 4,337 3,931 3,368
Local and other initiatives 2,226 1,569 1,393
Other and eliminations (1,418) (1,195) (1,111)
Total revenues $51,319 $50,546 $48,445
A pie chart appears containing the following information:
AT&T 1997 External Revenue by Category
As percentage of total revenue
47% Consumer long-distance services
41% Business long-distance services
8% Wireless services
4% Local and other initiatives
Business long-distance services revenue, made up primarily of revenue from voice
and data services, and related products sales, increased $621 million, or 2.9%,
in 1997 and $1,095 million, or 5.4%, in 1996. Adjusted for the sales of AT&T
Skynet and AT&T Tridom, business revenue grew 3.5% 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
lower rates,
<PAGE>
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. Despite
very competitive conditions, we held our market position in business services
with such major contract wins as American Express, Prudential, CVS, American
Home Products and the State of Florida. 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 long-distance services revenue declined $688 million, or 2.8%, in
1997 and increased $351 million, or 1.4%, 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 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 2.8% 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 optional 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.
<PAGE>
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 $46,174 million in 1997, essentially flat compared with
$46,241 million in 1996. Volume increased 8.7% for the year. In 1996
long-distance revenues increased $1,446 million, or 3.2%, on a volume increase
of 5.9%. The gap between volume and revenue growth widened to 8.8% 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 and product sales, increased $406 million, or 10.3%, 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 12.9%. The revenue growth was driven by consolidated
subscriber growth of 15.7%
<PAGE>
(18.3% adjusted) in 1997. In 1996 wireless revenue increased $563 million, or
16.7%, on a 31.7% 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.
[MAP] MAP OF THE UNITED STATES DISPLAYING AT&T WIRELESS SERVICES LICENSES
FOOTPRINT BY CELLULAR MARKET, PCS MARKET AND PARTNERSHIP MARKET
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 $54 per month from approximately $60 in 1996 and $69 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 5.2 million and 3.9 million,
respectively. Cellular subscribers in markets in which we have or share a
controlling interest were 8.2 million at December 31, 1997, up 14.7% from 7.1
million at December 31, 1996. Cellular customers on this basis were 5.5 million
at December 31, 1995.
Revenue for local and other initiatives increased $657 million, or 42.0%, in
1997 and $176 million, or 12.6%, in 1996. The 1997 increase resulted primarily
from increases in outsourcing revenue at AT&T Solutions, as well as revenue from
international markets, AT&T WorldNet and local service. Outsourcing revenue and
revenue from AT&T WorldNet drove the increase in 1996, partially offset by a
decline in revenue from international markets.
<PAGE>
Other and eliminations revenue primarily reflects 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 $44,351 million, an increase of 6.1%
from $41,783 million in 1996. In 1996 expenses increased 3.8% from $40,238
million.
Dollars in Millions
For the Years Ended December 31 1997 1996 1995
Access and other interconnection $16,306 $16,332 $17,618
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.
<PAGE>
In 1996 access costs declined $1,286 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 31.8% 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 pending merger with TCG.
Dollars in Millions
For the Years Ended December 31 1997 1996 1995*
Network and other
communications services $9,316 $7,918 $6,913
*Excludes restructuring and other charges of $844
Network and other communications services expenses include the costs of
operating and maintaining our network, operator services, nonincome taxes, the
provision for uncollectible receivables and compensation to payphone operators.
More than half of the $1,398 million, or 17.6%, increase in 1997 was due to
higher costs for initiatives, particularly AT&T Solutions, AT&T WorldNet and
local service. 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, AT&T was able to reverse some of the expense previously
accrued in 1997. We are currently asking for further relief from this expense as
we believe that the $0.284 per call rate remains above the actual cost to
payphone operators of providing services.
<PAGE>
Network and other communications services expenses increased $1,005 million,
or 14.5%, 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 $3,827 $2,740 $2,586
*Excludes restructuring and other charges of $934
Depreciation and amortization expenses increased $1,087 million, or 39.6%, in
1997. The increase was driven by higher levels of capital expenditures which
totaled $3.0 billion in the fourth quarter of 1996 and $7.2 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 $154 million, or 6.0%, 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 $14,902 $14,793 $13,121
*Excludes restructuring and other charges of $1,245
Selling, general and administrative expenses increased $109 million, or 0.7%, in
1997. SG&A expenses were 29.0% of revenues in 1997, 29.3% in 1996 and 27.1% in
1995. While investment in initiatives and
<PAGE>
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. As the
chart shows, our year-over-year growth in SG&A declined each quarter in 1997.
<TABLE>
<CAPTION>
A chart appears containing the following information:
SG&A Expenses Year-over-Year Growth
#: SG&A Expenses Year-over-Year Growth Rate Percentages
<S> <C> <C> <C> <C>
7.00%
#
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
#
0.00%
(1.00%) #
(2.00%)
#
(3.00%)
1Q97 2Q97 3Q97 4Q97
</TABLE>
Partially offsetting our savings were higher retention and acquisition costs in
wireless markets. AT&T Wireless Services invested heavily in migrating customers
to digital service in 1997, which lowers costs over time. These migration costs
plus the costs of
<PAGE>
servicing a growing customer base caused the increase in overall customer costs
in wireless. However, cost per customer acquisition in cellular markets was 6.1%
lower in 1997 than in 1996 as a result of our focus on less expensive
distribution channels.
Selling, general and administrative expenses increased $1,672 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 30% 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 $350 million in 1998. Slightly 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 $829 million, $822 million and $732
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. These
expenses included $6 million of restructuring and other charges in 1995.
Dollars in Millions
For the Years Ended December 31 1997 1996 1995
Other income - net $416 $390 $284
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>
Dollars in Millions
EBIT
For the Years Ended December 31 1997 1996 1995
Total AT&T* $7,384 $9,153 $8,491
Wireless services $271 $600 $406
*Excludes restructuring and other charges of $3,023 in 1995
EBIT decreased $1,769 million, or 19.3%, 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 $662 million, or 7.8%, 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 $191 $343 $490
Interest expense decreased $152 million, or 44.1%, in 1997 due to lower levels
of average debt and a higher proportion of capitalized interest. 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 $147 million, or 30.1%, in 1996 compared with 1995
due to lower levels of average debt, which 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 $2,721 $3,237 $2,934
*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 37.8% in 1997 and 36.7% in both 1996 and 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>
by lower state tax rates and higher research credits. The 1995 effective tax
rate including restructuring and other charges was 39.0%.
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.
[PHOTOGRAPH] PHOTOGRAPH OF AN AT&T WIRELESS PHONE
Dollars in Millions
Local Services Initiative
For the Years Ended December 31 1997 1996 1995
EBIT $(987) $(467) $(155)
EBITDA $(916) $(457) $(155)
Capital Expenditures $ 853 $ 775 $ 353
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 pending 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.
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.
Nevertheless, despite the difficulty of the regulatory environment, local
<PAGE>
service is a key growth opportunity and we will continue to work to develop
alternative methods of local entry.
Dollars in Millions
Wireless Initiatives
For the Years Ended December 31 1997 1996 1995
EBIT $(432) $ (95) $ -
EBITDA $(310) $ (76) $ -
Capital Expenditures $ 823 $ 659 $ -
Our wireless initiatives include wireless service in new markets, wireless data
services and international expansion. 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 February 1998 we had announced agreements
with 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
[PHOTOGRAPH] PHOTOGRAPH OF INSIDE AN AT&T SOLUTIONS FACILITY
Other initiatives include AT&T Solutions, AT&T WorldNet and
<PAGE>
other online 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.
[IMAGE] IMAGE OF THE AT&T WORLDNET HOMEPAGE
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. Alestra, our Mexican joint venture with Grupo Alfa and VISA-Bancomer,
had over one million lines presubscribed in 1997, leading all of the other
carriers competing against the former monopoly carrier, TelMex. However, equity
losses from Alestra exceeded our expectations in 1997. In 1997 we also announced
a proposed alliance with Telecom Italia that we believe will enhance our ability
to serve multinational customers in Europe and Latin America. Telecom Italia
will join the AT&T-Unisource joint venture in Europe. In addition, we plan to
form a joint venture with Telecom Italia to serve customers in Latin America.
<PAGE>
CASH FLOWS
Dollars in Millions
EBITDA
For the Years Ended December 31 1997 1996 1995
Total AT&T* $11,277 $11,955 $11,127
Wireless services $1,237 $1,332 $971
*Excludes restructuring and other charges of $2,089 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 $678 million, or 5.7%, in 1997 was due primarily to
an increase in network and other communications services expenses partially
offset by increased revenues. The 1996 increase of $828 million, or 7.4%, 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 $8,437 $7,875 $8,198
Cash flow from operations increased $562 million, or 7.1%, in 1997 and decreased
$323 million, or 3.9%, 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 $500 million 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 $(6,407) $ (975) $(8,163)
<PAGE>
<TABLE>
<CAPTION>
A chart appears containing the following information:
1997 Capital Expenditures by Business
#: Business Long-distance
@: Consumer Long-distance
^: Traditional Wireless
&: Wireless Initiatives
+: Local Service
>: Other Initiatives
<S> <C> <C> <C> <C> <C> <C>
dollars in
billions
4
3.5 #
3
2.5
2
1.5
1
+
&
@ ^
.5
>
0
Business Consumer Traditional Wireless Local Other
Long- Long- Wireless Initiatives Service Initiatives
distance distance
</TABLE>
[PHOTOGRAPH] PHOTOGRAPH OF AT&T'S WORLDWIDE NETWORK OPERATIONS CENTER
Included in 1997 investing activities were net capital expenditures, the net
funding requirements for UCS, acquisitions of licenses and proceeds received
from divestments. While we have agreed to sell UCS, we continue to fund its
operations. Our assets, therefore, include short- and long-term notes receivable
from UCS, and our debt includes external debt used to fund UCS. In accordance
with the purchase agreement, at the time of sale in 1998 we will receive cash
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.
[PHOTOGRAPH] PHOTOGRAPH OF AN AT&T UNIVERSAL CARD SERVICES CREDIT CARD
Capital expenditures, acquisitions of investments, licenses and businesses
amounted to $7,648 million in 1997, $7,183 million in 1996 and $9,888 million in
1995. This resulted in net cash outlays for these categories in 1997, 1996 and
1995 of $7,578 million, $6,741 million and $9,981 million, respectively.
We expect our 1998 capital expenditures to be about $7 billion; in addition,
TCG anticipates 1998 capital expenditures of $1 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>
Dollars in Millions
For the Years Ended December 31 1997 1996 1995
Cash flows from
financing activities $(1,801) $(5,380) $1,457
In 1997 we raised 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 $662 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 $1,236 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 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 $2,137 million of
long-term debt, but borrowed an additional $2,392 million of long-term debt and
$1,976 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, resulting in a cash payment of $163 million.
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>
connection with the TCG merger and a proposed cross-shareholding arrangement
with Telecom Italia, dividend payments will increase, assuming that the
company's dividend policy remains the same. To support potential future needs,
our Board of Directors has proposed an increase in the number of authorized
shares from 2 billion to 6 billion.
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 $311 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>
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 $58,635 $55,382
Total assets from continuing operations $57,534 $53,872
Total assets from continuing operations increased $3,662 million, or 6.8%, in
1997 primarily due to increases in property, plant and equipment and long-term
receivables, partially offset by decreases in other receivables and accounts
receivable. The increase in property, plant and equipment resulted from
investment in the network, 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 now reflects the receivable from UCS that is expected to
be 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 revenue.
<PAGE>
Dollars in Millions
At December 31 1997 1996
Total liabilities $35,988 $35,087
Total liabilities increased $901 million, or 2.6%, 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 $22,647 $20,295
Shareowners' equity increased $2,352 million, or 11.6%, in 1997. The increase
was driven by net income, partially offset by 1997 dividends.
At December 31 1997 1996
Debt ratio 32.3% 33.7%
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 our pending asset dispositions to
retire a certain amount of outstanding debt.
<PAGE>
<TABLE>
<CAPTION>
A chart appears containing the following information:
AT&T Capitalization
#: Debt in dollars
@: Equity in dollars
+: Debt Ratio
dollars in
billions percent
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$25 Billion 60%
@
# +
@ 50%
20
@
40%
15 +
# +
# 30%
10
20%
5
10%
0 0%
1995 1996 1997
Debt Equity Debt Ratio
1995 20,709 17,274 54.5%
1996 10,332 20,295 33.7%
1997 10,824 22,647 32.3%
</TABLE>
<PAGE>
LEGISLATIVE AND REGULATORY DEVELOPMENTS
The Telecommunications Act of 1996 was designed to foster local exchange
competition by establishing a regulatory framework to govern new competitive
entry in local and long-distance telecommunications services. The
Telecommunications Act also permits Regional Bell Operating Companies (RBOCs) to
provide interexchange services originating in any state in its region after
demonstrating to the FCC that such provision is in the public interest and
satisfying the conditions for developing local competition established by the
Telecommunications Act.
A number of court decisions have severely restricted implementation of the
Telecommunications Act and delayed local service competition. In July 1997 the
United States Court of Appeals for the Eighth Circuit vacated the pricing rules
that the FCC had adopted to implement the sections of the local competition
provisions of the Telecommunications Act applicable to interconnection with
local exchange carrier (LEC) networks and the purchase of unbundled network
elements and wholesale services from LECs. In October 1997 the Eighth Circuit
vacated an FCC Rule that had prohibited incumbent LECs from separating network
elements that are combined in the LECs' network, except at the request of the
competitor purchasing the elements. These decisions increased the difficulty and
costs of providing competitive local service through resale or the use of
unbundled network elements purchased from the incumbent LECs.
On January 26, 1998, the United States Supreme Court agreed to review the
aforementioned decisions of the Eighth Circuit Court of Appeals. Under the
normal procedures of the Court, arguments are expected to be heard in October
1998 and a decision is expected sometime in the first half of 1999.
On December 31, 1997, the U.S. District Court for the Northern District of
Texas issued a memorandum opinion and order holding that the Telecommunications
Act's restrictions on the provision of in-region, interLATA service by the RBOCs
are unconstitutional. AT&T and other carriers (collectively, "Intervenors") have
filed an appeal with the United States Court of Appeals for the Fifth Circuit,
and the FCC is expected to do the same. On February 11, 1998, the District Court
suspended the effectiveness of its December 31 memorandum opinion and order
pending appeal. If the memorandum opinion and order is permitted to take effect,
the Telecommunications Act's restrictions on the provisions of in-region,
interLATA services will no longer apply to the plaintiffs in the case, SBC
Communications, Inc., US West, Inc. and Bell Atlantic Corporation.
<PAGE>
COMPETITION
AT&T currently faces significant competition and expects that the level of
competition will continue to increase. The Telecommunications Act permits RBOCs
to provide interLATA interexchange services after demonstrating to the FCC that
such provision is in the public interest and satisfying the conditions for
developing local competition established by the Telecommunications Act. Three
RBOCs have petitioned the FCC for permission to provide interLATA interexchange
services in one or more states within their home market; to date the FCC has not
granted any such petition. To the extent that the RBOCs obtain in-region
interLATA authority before the Telecommunications Act's checklist of conditions
have been fully or satisfactorily implemented and adequate facilities-based
local exchange competition exists, there is a substantial risk that AT&T and
other interexchange service providers would be at a disadvantage to the RBOCs in
providing both local service and combined service packages. Because it is widely
anticipated that substantial numbers of long-distance customers will seek to
purchase local, interexchange and other services from a single carrier as part
of a combined or full service package, any competitive disadvantage, inability
to profitably provide local service at competitive rates, or delays or
limitations in providing local service or combined service packages is likely to
adversely affect AT&T's future revenues and earnings. In addition, the
simultaneous entrance of numerous new competitors for interexchange and combined
service packages is likely to adversely affect AT&T's long-distance revenues and
could adversely affect earnings.
RECENT PRONOUNCEMENTS
Effective with the first quarter 1998 reporting we will adopt Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes the standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and losses)
as part of a full set of financial statements. This statement requires that all
elements of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Since this
standard applies only to the presentation of comprehensive income, it will not
have any impact on AT&T's results of operations, financial position or cash
flows.
<PAGE>
Beginning with the 1998 annual report we will also 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.
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>
<TABLE>
<CAPTION>
SEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(UNAUDITED)
AT&T Corp. and Subsidiaries
Dollars in millions (except per share amounts)
1997 1996 1995* 1994 1993* 1992 1991*
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Revenues $51,319 $50,546 $48,445 $46,000 $43,780 $42,960 $41,842
Operating income 6,968 8,763 5,184 7,409 6,577 6,246 2,681
Income from continuing operations
before cumulative effects of
accounting changes 4,472 5,573 3,035 4,260 3,786 3,233 1,199
Income before cumulative
effects of accounting changes 4,638 5,908 139 4,710 3,702 3,442 171
Net income(loss) 4,638 5,908 139 4,710 (5,906) 3,442 171
Earnings per common share-basic:
Income from continuing
operations before cumulative
effects of accounting changes 2.75 3.46 1.92 2.74 2.46 2.14 0.82
Income before cumulative
effects of accounting changes 2.85 3.67 0.09 3.03 2.41 2.28 0.12
Net income(loss) 2.85 3.67 0.09 3.03 (3.84) 2.28 0.12
Earnings per common share-diluted:
Income from continuing
operations before cumulative
effects of accounting changes 2.74 3.45 1.91 2.72 2.45 2.13 0.81
Income before cumulative
effects of accounting changes 2.84 3.66 0.09 3.01 2.39 2.27 0.12
Net income(loss) 2.84 3.66 0.09 3.01 (3.82) 2.27 0.12
Dividends declared per
common share 1.32 1.32 1.32 1.32 1.32 1.32 1.32
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(UNAUDITED)
AT&T Corp. and Subsidiaries
Dollars in millions (except per share amounts)
1997 1996 1995* 1994 1993* 1992 1991*
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS AND CAPITAL
Property, plant and
equipment-net $22,710 $19,736 $16,021 $14,377 $13,653 $13,590 $13,058
Total assets-
continuing operations 57,534 53,872 53,726 47,439 41,353 40,124 37,172
Total assets 58,635 55,382 62,228 57,330 50,023 50,521 48,695
Long-term debt 6,826 7,883 8,545 8,938 10,287 12,210 12,167
Total debt 10,824 10,332 20,709 18,492 18,185 17,120 16,756
Shareowners' equity 22,647 20,295 17,274 17,921 13,374 20,313 17,973
Gross capital expenditures 7,213 6,776 4,504 3,361 2,537 2,293 2,424
Employees-continuing
operations 127,800 126,600 124,600 115,300 118,100 118,200 115,300
OTHER INFORMATION
Operating income as a
percentage of revenues 13.6% 17.3% 10.7% 16.1% 15.0% 14.5% 6.4%
Income from continuing
operations as a percentage
of revenues 8.7% 11.0% 6.3% 9.3% 8.6% 7.5% 2.9%
Return on average common
equity 21.5% 28.0% 0.7% 29.5% (47.1)% 17.6% 0.9%
Data at year-end:
Stock price per share** $61.31 $41.31 $44.40 $34.46 $36.00 $34.97 $26.83
Book value per
common share $13.94 $12.50 $10.82 $11.42 $8.65 $13.31 $12.05
Debt ratio 32.3% 33.7% 54.5% 50.8% 57.6% 45.7% 48.2%
<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.
1991 continuing operations data reflect $3.5 billion of pretax business
restructuring and other charges.
** Stock prices for 1991-1996 have been restated to reflect the spin-offs of
Lucent and NCR.
</FN>
</TABLE>
<PAGE>
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and objectivity of the
consolidated financial statements and all other financial information included
in this report. Management is also responsible for maintaining a system of
internal controls as a fundamental requirement for the operational and financial
integrity of results.
The financial statements, which reflect the consolidated accounts of AT&T
Corp. and subsidiaries (AT&T) and other financial information shown, were
prepared in conformity with generally accepted accounting principles. Estimates
included in the financial statements were based on judgments of qualified
personnel.
To maintain its system of internal controls, management carefully selects key
personnel and establishes the organizational structure to provide an appropriate
division of responsibility. We believe it is essential to conduct business
affairs in accordance with the highest ethical standards as set forth in the
AT&T Code of Conduct. These guidelines and other informational programs are
designed and used to ensure that policies, standards and managerial authorities
are understood throughout the organization. Our internal auditors monitor
compliance with the system of internal controls by means of an annual plan of
internal audits. On an ongoing basis, the system of internal controls is
reviewed, evaluated and revised as necessary in light of the results of constant
management oversight, internal and independent audits, changes in AT&T's
business and other conditions.
Management believes that the system of internal controls, taken as a whole,
provides reasonable assurance that (1) financial records are adequate and can be
relied upon to permit the preparation of financial statements in conformity with
generally accepted accounting principles and (2) access to assets occurs only in
accordance with management's authorizations.
The Audit Committee of the Board of Directors, which is composed of directors
who are not employees, meets periodically with management, the internal auditors
and the independent accountants to review the manner in which these groups of
individuals are performing their responsibilities and to carry out the Audit
Committee's oversight role with respect to auditing, internal controls and
financial reporting matters. Periodically, both the internal auditors and the
independent accountants meet privately with the Audit Committee. These
accountants also have access to the Audit Committee and its individual members
at any time.
<PAGE>
The consolidated financial statements in this annual report have been audited
by Coopers & Lybrand L.L.P., Independent Accountants. Their audits were
conducted in accordance with generally accepted auditing standards and include
an assessment of the internal control structure and selective tests of
transactions. Their report follows.
Daniel E. Somers C. Michael Armstrong
Senior Executive Vice President, Chairman of the Board,
Chief Financial Officer Chief Executive Officer
REPORT OF INDEPENDENT ACCOUNTANTS To the Shareowners of AT&T Corp.:
We have audited the consolidated balance sheets of AT&T Corp.
and subsidiaries (AT&T) at December 31, 1997 and 1996, and the
related consolidated statements of income, changes in shareowners' equity and
cash flows for the years ended December 31, 1997, 1996 and 1995. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of AT&T at December
31, 1997 and 1996, and the consolidated results of their operations and their
cash flows for the years ended December 31, 1997, 1996 and 1995, in conformity
with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
1301 Avenue of the Americas
New York, New York
January 26, 1998
<PAGE>
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................................... $51,319 $50,546 $48,445
Operating Expenses
Access and other interconnection........... 16,306 16,332 17,618
Network and other communications services.. 9,316 7,918 7,757
Depreciation and amortization.............. 3,827 2,740 3,520
Selling, general and administrative........ 14,902 14,793 14,366
Total operating expenses................... 44,351 41,783 43,261
Operating income........................... 6,968 8,763 5,184
Other income-net........................... 416 390 284
Interest expense........................... 191 343 490
Income from continuing operations before
income taxes............................. 7,193 8,810 4,978
Provision for income taxes................. 2,721 3,237 1,943
Income from continuing operations.......... 4,472 5,573 3,035
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 ................................ $ 4,638 $ 5,908 $ 139
Weighted-average common shares and
potential common shares (millions)*...... 1,630 1,616 1,592
Per Common Share-Basic:
Income from continuing operations.......... $ 2.75 $ 3.46 $ 1.92
Income(loss) from discontinued operations.. 0.06 0.11 (1.83)
Gain on sale of discontinued operations.... 0.04 0.10 -
Net income................................. $ 2.85 $ 3.67 $ 0.09
Per Common Share-Diluted:
Income from continuing operations.......... $ 2.74 $ 3.45 $ 1.91
Income(loss) from discontinued operations.. 0.06 0.11 (1.82)
Gain on sale of discontinued operations.... 0.04 0.10 -
Net income................................. $ 2.84 $ 3.66 $ 0.09
* Amounts represent the weighted-average shares assuming dilution from the
potential exercise of outstanding stock options. Amounts are reduced by 5
million, 6 million and 8 million shares for 1997, 1996 and 1995, respectively,
assuming no dilution.
The notes on pages 46 through 71 are an integral part of the consolidated
financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS AT&T CORP. AND SUBSIDIARIES
At December 31
Dollars in millions 1997 1996
ASSETS
Cash and cash equivalents $ 145 $ -
Receivables, less allowances of $977 and $942
Accounts receivable 8,573 8,969
Other receivables 5,684 6,140
Deferred income taxes 1,252 1,266
Other current assets 525 698
TOTAL CURRENT ASSETS 16,179 17,073
Property, plant and equipment-net 22,710 19,736
Licensing costs, net of accumulated
amortization of $1,076 and $913 8,329 8,071
Investments 3,857 3,875
Long-term receivables 1,794 872
Prepaid pension costs 2,156 1,933
Other assets 2,509 2,312
Net assets of discontinued operations 1,101 1,510
TOTAL ASSETS $58,635 $55,382
LIABILITIES
Accounts payable $ 6,243 $ 6,157
Payroll and benefit-related liabilities 2,348 2,614
Debt maturing within one year 3,998 2,449
Dividends payable 538 536
Other current liabilities 3,815 4,395
TOTAL CURRENT LIABILITIES 16,942 16,151
Long-term debt 6,826 7,883
Long-term benefit-related liabilities 3,142 3,037
Deferred income taxes 5,711 4,827
Other long-term liabilities and
deferred credits 3,367 3,189
TOTAL LIABILITIES 35,988 35,087
SHAREOWNERS' EQUITY
Common shares, par value $1 per share 1,624 1,623
Authorized shares: 2,000,000,000
Outstanding shares: 1,624,213,505 at December 31, 1997;
1,623,487,646 at December 31, 1996
Additional paid-in capital 15,751 15,697
Guaranteed ESOP obligation (70) (96)
Foreign currency translation adjustments (28) (7)
Retained earnings 5,370 3,078
TOTAL SHAREOWNERS' EQUITY 22,647 20,295
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $58,635 $55,382
The notes on pages 46 through 71 are an integral part of the consolidated
financial statements.
<PAGE>
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 $ 1,623 $ 1,596 $ 1,569
Shares issued, net:
Under employee plans 1 19 13
Under shareowner plans - 8 13
Other - - 1
Balance at end of year 1,624 1,623 1,596
Additional Paid-In Capital
Balance at beginning of year 15,697 16,614 15,825
Shares issued(acquired), net:
Under employee plans (24) 975 598
Under shareowner plans 9 434 687
Other 69 - 31
Dividends declared - - (527)
Spin-offs of Lucent and NCR - (2,326) -
Balance at end of year 15,751 15,697 16,614
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)
Foreign Currency Translation Adjustments
Balance at beginning of year (7) 5 145
Translation adjustments (21) (33) (140)
Spin-offs of Lucent and NCR - 21 -
Balance at end of year (28) (7) 5
Retained Earnings(Deficit)
Balance at beginning of year 3,078 (687) 687
Net income 4,638 5,908 139
Dividends declared (2,145) (2,132) (1,570)
Treasury shares issued at less than cost (187) - -
Other changes (14) (11) 57
Balance at end of year 5,370 3,078 (687)
Total Shareowners' Equity $22,647 $20,295 $17,274
In March 1990 we issued 13.4 million new shares of common stock in connection
with the establishment of an ESOP feature for the non-management 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 on pages 46 through 71 are an integral part of the consolidated
financial statements.
<PAGE>
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 $ 4,638 $ 5,908 $ 139
Add:(Income)loss from discontinued operations (100) (173) 2,896
Gain on sale of discontinued operations (66) (162) -
Income from continuing operations 4,472 5,573 3,035
Adjustments to reconcile net income to net cash
provided by operating activities of continuing
operations:
Restructuring and other charges - - 3,023
Depreciation and amortization 3,827 2,740 2,586
Provision for uncollectibles 1,957 1,938 1,613
Increase in accounts receivable (1,431) (2,165) (2,220)
Increase in accounts payable 16 513 872
Net increase in other operating
assets and liabilities (787) (1,079) (87)
Other adjustments for noncash items-net 383 355 (624)
NET CASH PROVIDED BY OPERATING ACTIVITIES
OF CONTINUING OPERATIONS 8,437 7,875 8,198
INVESTING ACTIVITIES
Capital expenditures (7,143) (6,334) (4,597)
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 decrease(increase) in investments 109 (140) 9
Dispositions(acquisitions), net of
cash acquired 1,513 2,145 (3,406)
Other investing activities-net (155) (23) (240)
NET CASH USED IN INVESTING ACTIVITIES OF
CONTINUING OPERATIONS (6,407) (975) (8,163)
FINANCING ACTIVITIES
Proceeds from long-term debt issuances - - 2,392
Retirements of long-term debt (662) (1,236) (2,137)
(Acquisition) issuance of common shares (163) 1,293 1,214
Dividends paid (2,142) (2,122) (2,088)
Increase(decrease) in short-term
borrowings-net 1,114 (5,301) 1,976
Other financing activities-net 52 1,986 100
NET CASH (USED IN)PROVIDED BY FINANCING
ACTIVITIES OF CONTINUING OPERATIONS (1,801) (5,380) 1,457
Net cash used in discontinued operations (84) (1,595) (1,544)
Net increase(decrease) in cash and cash
equivalents 145 (75) (52)
Cash and cash equivalents at beginning
of year - 75 127
Cash and cash equivalents at end of year $ 145 $ - $ 75
The notes on pages 46 through 71 are an integral part of the consolidated
financial statements.
<PAGE>
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 $1,985, $2,526
and $2,148 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>
CASH EQUIVALENTS
We consider all highly liquid investments with original maturities of generally
three months or less to be cash equivalents.
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>
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 1997
presentation.
<PAGE>
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 $.10 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 noncash 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 $.04 per share.
<PAGE>
On October 20, 1997, AT&T announced its plans to sell AT&T Universal Card
Services, Inc. (UCS). On December 17, 1997, AT&T entered into an agreement with
Citicorp to sell UCS for approximately $3.5 billion. In addition, the two
companies signed a 10-year co-branding and joint-marketing agreement. The sale
is subject to regulatory approval and is expected to be completed by the second
quarter of 1998.
The consolidated financial statements of AT&T have been restated to reflect
the dispositions of Lucent, NCR, AT&T Capital, SSI and other businesses as well
as the pending sale of UCS 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 the 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 are payable
to AT&T.
<PAGE>
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
Effective with the first quarter 1998 we will adopt SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes the standards for reporting and
displaying comprehensive income and its components (revenues, expenses, gains
and losses) as part of a full set of financial statements. This statement
requires that all elements of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Since this standard applies only to the presentation of
comprehensive income, it will not have any impact on AT&T's results of
operations, financial position or cash flows.
Beginning with the 1998 annual report we will also 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.
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
$.7 billion.
<PAGE>
On August 12, 1997, AT&T entered into an agreement to sell its 45% common
share interest in LIN Television Corporation, a subsidiary of LIN, for
approximately $641 to Hicks, Muse, Tate and Furst Incorporated ("Hicks Muse").
Subsequently, in response to a competitive offer, Hicks Muse increased their bid
to $742. The sale is subject to various conditions, including approval by the
Federal Communications Commission. If approved, the sale is expected to close in
early 1998. In a separate agreement, AT&T agreed to sell WOOD-TV, its television
station in Grand Rapids, Michigan, for approximately $123, subject to certain
adjustments, upon the completion of the sale of its interest in LIN.
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 51 52 74
INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE
Research and development expenses $829 $822 $732
OTHER INCOME-NET
Interest income $ 28 $ 18 $ 38
Minority interests in earnings
of subsidiaries (12) (15) (17)
Net equity earnings from investments 35 67 103
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 $416 $390 $284
DEDUCTED FROM INTEREST EXPENSE
Capitalized interest $254 $193 $107
<PAGE>
SUPPLEMENTARY BALANCE SHEET INFORMATION
At December 31 1997 1996
PROPERTY, PLANT AND EQUIPMENT
Machinery, electronic and other equipment $ 37,433 $ 32,761
Buildings and improvements 6,744 6,251
Land and improvements 386 373
Total property, plant and equipment 44,563 39,385
Accumulated depreciation (21,853) (19,649)
Property, plant and equipment-net $ 22,710 $ 19,736
OTHER ASSETS
Unamortized goodwill $ 1,277 $ 1,325
Deferred charges 724 477
Other 508 510
Total other assets $ 2,509 $ 2,312
SUPPLEMENTARY CASH FLOW INFORMATION
For the Years Ended December 31 1997 1996 1995
Interest payments net of
amounts capitalized $ 207 $ 364 $ 436
Income tax payments 2,414 2,136 2,016
<PAGE>
6. BUSINESS RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1995 we recorded a pretax 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 voluntary retirement incentive program to
be offered to managers during the second quarter of 1998. The expected
acceptance rate of 10,000 to 11,000 employees for the voluntary retirement
incentive offer may impact the utilization of the remaining 1995 restructuring
reserve balance. Another 5,000 to 7,000 employees will leave through a
combination of managed attrition and previously announced workforce reductions.
The following table displays a rollforward of the liabilities for business
restructuring from December 31, 1995, to December 31, 1997:
<PAGE>
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 for 1995 was recorded as $844 in network and
other communications services expenses; $934 in depreciation and amortization
expenses, and $1,245 in selling, general and administrative expenses. If viewed
by type of cost, the combined charges reflect $950 for employee separations and
other related items; $1,235 for asset write-downs; $497 for closing, selling and
consolidating facilities; and $341 for other items. The total charge reduced
income from continuing operations by $2,032, or diluted earnings per share by
$1.28 in 1995.
<PAGE>
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 $2.08 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 $2,517 $3,084 $1,743
Amortization of investment tax credits (14) (21) (35)
State and local income taxes, net of
federal income tax effect 182 272 179
Amortization of intangibles 20 13 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 (6) (53) 12
Provision for income taxes $2,721 $3,237 $1,943
Effective income tax rate 37.8% 36.7% 39.0%
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 $7,311 $9,013 $5,465
Foreign (118) (203) (487)
Total $7,193 $8,810 $4,978
PROVISION FOR INCOME TAXES
CURRENT
Federal $1,561 $2,291 $1,922
State and local 192 397 383
Foreign 49 25 1
$1,802 $2,713 $2,306
DEFERRED
Federal $ 851 $ 511 $ (221)
State and local 89 23 (108)
Foreign (5) 11 1
$ 935 $ 545 $ (328)
Deferred investment tax credits (16) (21) (35)
Provision for income taxes $2,721 $3,237 $1,943
<PAGE>
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 $6,204 $5,302
Investments 319 96
Other 1,185 1,403
Total long-term deferred income tax liabilities $7,708 $6,801
LONG-TERM DEFERRED INCOME TAX ASSETS
Business restructuring $ 162 $ 195
Net operating loss/credit carryforwards 273 220
Employee pensions and other benefits-net 1,026 1,298
Reserves and allowances 93 120
Other 654 305
Valuation allowance (211) (164)
Total net long-term deferred income tax assets $1,997 $1,974
Net long-term deferred income tax liabilities $5,711 $4,827
CURRENT DEFERRED INCOME TAX LIABILITIES
Total current deferred income tax liabilities $ 175 $ 117
CURRENT DEFERRED INCOME TAX ASSETS
Business restructuring $ 225 $ 249
Net operating loss/credit carryforwards 5 3
Employee pensions and other benefits 304 523
Reserves and allowances 629 594
Other 264 14
Total net current deferred income tax assets $1,427 $1,383
Net current deferred income tax assets $1,252 $1,266
At December 31, 1997, we had net operating loss carryforwards (tax-effected)
for federal and state income tax purposes of $32 and $76, respectively, expiring
through 2012. 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>
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>
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>
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>
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 $197 in 1997,
$178 in 1996 and $156 in 1995.
<PAGE>
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>
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 3 million shares to employees in both 1997 and 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 $94 and $40 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 46,910 $33.89 47,689 $43.21 40,285
Lucent and NCR
spin-off adjustments - - 22,678 - -
Options granted 36,485 $38.81 9,132 $45.53 13,276
Options and SARs
exercised (10,832) $24.89 (10,708) $19.16 (8,181)
Average exercise price $29.39
Options assumed in
purchase of LIN - - - - 3,382
Options canceled or
forfeited:
Lucent and NCR
spin-offs - - (16,179) $37.25 -
Other employee plans (4,058) $40.47 (5,702) $37.12 (1,073)
At December 31:
Options outstanding 68,505 $37.50 46,910 $33.89 47,689
Average exercise price $43.21
Options exercisable 22,981 $33.26 28,034 $28.81 28,775
Shares available
for grant 85,859 - 19,693 - 17,524
<PAGE>
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, 341,783 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 $4,384 $5,502 $ 3,022
Income(loss) from discontinued operations 99 146 (2,902)
Gain on sale of discontinued operations 66 162 -
Net income $4,549 $5,810 $ 120
Earnings per common share-basic:
Continuing operations $ 2.70 $ 3.42 $ 1.91
Discontinued operations 0.06 0.09 (1.83)
Gain on sale of discontinued operations 0.04 0.10 -
Net income $ 2.80 $ 3.61 $ 0.08
Earnings per common share-diluted:
Continuing operations $ 2.69 $ 3.41 $ 1.90
Discontinued operations 0.06 0.09 (1.82)
Gain on sale of discontinued operations 0.04 0.10 -
Net income $ 2.79 $ 3.60 $ 0.08
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
$5,532, or $3.42 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>
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 - $15.76 318 1.9 $13.64 318 $13.64
15.83 - 27.12 6,611 3.5 24.40 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 1,126 9.9 54.58 - -
68,505 7.5 $37.50 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 874 463
Other 11 36
Total debt maturing within one year $3,998 $2,449
Weighted-average interest rate of
short-term debt 5.8% 5.5%
A consortium of lenders provides revolving credit facilities of $5.0 billion
to AT&T. These credit facilities are intended for general corporate purposes,
which include support for AT&T's commercial paper, and were unused at December
31, 1997.
<PAGE>
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 4,341
8% to 8 17/20% 1998-2025 579 786
9 3/5% to 12 7/8% 1998-2004 30 60
Variable rate 1998-2054 67 115
Total debentures and notes 7,672 8,298
Other 83 112
Less: Unamortized discount-net 55 64
Total long-term obligations 7,700 8,346
Less: Currently maturing long-term debt 874 463
Net long-term obligations $6,826 $7,883
(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 $7,700 in total
long-term obligations:
1998 1999 2000 2001 2002 Later Years
$874 $1,063 $658 $657 $504 $3,944
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>
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>
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>
For debt excluding capital leases, the carrying amounts and fair values were
$10,810 and $11,112, respectively, for 1997; and $10,319 and $10,609,
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 $822 in 1997, $718 in 1996
and $653 in 1995. The following table shows our future minimum lease payments
due under noncancelable operating leases at December 31, 1997. Such payments
total $3,384. 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
$652 $528 $444 $334 $249 $1,177
<PAGE>
14. QUARTERLY INFORMATION (UNAUDITED)
1997 First Second Third Fourth
Revenues $12,662 $12,825 $13,004 $12,828
Operating income 1,639 1,511 1,775 2,043
Income from continuing operations 1,088 928 1,133 1,323
Income from discontinued
operations 38 31 20 11
Gain on sale of discontinued
operation - - 66 -
Net income 1,126 959 1,219 1,334
Income per common share-basic:
Continuing operations .67 .57 .70 .81
Discontinued operations .02 .02 .01 .01
Gain on sale of discontinued
operation - - .04 -
Net income .69 .59 .75 .82
Income per common share-diluted:
Continuing operations .67 .57 .69 .81
Discontinued operations .02 .02 .02 -
Gain on sale of discontinued
operation - - .04 -
Net income .69 .59 .75 .81
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>
1996 First Second Third Fourth
Revenues $12,378 $12,459 $12,837 $12,872
Operating income 2,369 2,273 2,211 1,910
Income from continuing
operations 1,439 1,509 1,380 1,245
Income(loss) from discontinued
operations (77) (18) 52 216
Gain on sale of
discontinued operation - - - 162
Net income 1,362 1,491 1,432 1,623
Income(loss) per common share-basic:
Continuing operations .90 .94 .85 .77
Discontinued operations (.05) (.01) .04 .13
Gain on sale of
discontinued operation - - - .10
Net income .85 .93 .89 1.00
Income(loss) per common share-diluted:
Continuing operations .90 .93 .85 .77
Discontinued operations (.05) (.01) .04 .13
Gain on sale of discontinued
operation - - - .10
Net income .85 .92 .89 1.00
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.
15. SUBSEQUENT EVENT
On January 8, 1998, AT&T signed a definitive merger agreement with Teleport
Communications Group Inc. (TCG) for an all-stock transaction valued at
approximately $11.3 billion. Under the agreement each TCG share will be
exchanged for .943 of an AT&T share. The merger is subject to regulatory
approvals and certain other conditions as well as the receipt of opinions that
the merger will be tax-free to TCG shareowners. The transaction is expected to
close in the second half of 1998.