UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
..X.. QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
..... TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to _____________
Commission file number 1-1105
AT&T CORP.
A New York I.R.S. Employer
Corporation No. 13-4924710
32 Avenue of the Americas, New York, New York 10013-2412
Telephone - Area Code 212-387-5400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ..X No .....
At October 31, 1998, 1,753,577,000 common shares were outstanding.
<PAGE>
AT&T Form 10-Q/A - Part I
The undersigned registrant hereby amends its Form 10-Q filed with the
Securities Exchange Commission on November 13, 1998, for the quarter ended
September 30, 1998, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. Certain reclassifications were made to the Consolidated Statements
of Cash Flows. In addition, certain disclosures were added to the Notes to the
Consolidated Financial Statements and Management's Discussion and Analysis of
Results of Operations and Financial Condition.
<PAGE>
AT&T Form 10-Q/A - Part I
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1998 1997 1998 1997
Revenues................................... $13,653 $13,090 $39,695 $38,674
Operating Expenses
Access and other interconnection........... 3,819 3,975 11,649 12,488
Network and other
communications services................... 2,515 2,455 7,268 7,067
Depreciation and amortization ............. 1,194 1,019 3,388 2,927
Selling, general and administrative ....... 3,330 3,894 10,419 11,347
Restructuring and other charges............ (517) - 2,827 -
Total operating expenses .................. 10,341 11,343 35,551 33,829
Operating income........................... 3,312 1,747 4,144 4,845
Other income - net ........................ 156 132 1,169 371
Interest expense .......................... 114 75 322 241
Income from continuing operations
before income taxes ...................... 3,354 1,804 4,991 4,975
Provision for income taxes ................ 1,258 726 1,840 1,977
Income from continuing operations ......... 2,096 1,078 3,151 2,998
Income from discontinued operations
(net of taxes of $0, $6, $6, and $49)..... - 20 10 89
Gain on sale of discontinued operations
(net of taxes of $0, $43, $799 and $43)... - 66 1,290 66
Income before extraordinary loss........... 2,096 1,164 4,451 3,153
Extraordinary loss (net of taxes of $80)... 137 - 137 -
Net income ................................ $ 1,959 $ 1,164 $ 4,314 $ 3,153
Weighted average common shares and
potential common shares (millions)*....... 1,804 1,787 1,810 1,784
Per common share - basic:
Income from continuing operations ........ $ 1.17 $ 0.60 $ 1.76 $ 1.69
Income from discontinued operations....... - 0.01 0.01 0.04
Gain on sale of discontinued operations... - 0.04 .71 0.04
Extraordinary loss........................ (0.08) - (0.08) -
Net income ............................... $ 1.09 $ 0.65 $ 2.40 $ 1.77
Per common share - diluted:
Income from continuing operations ........ $ 1.16 $ 0.60 $ 1.74 $ 1.69
Income from discontinued operations....... - 0.01 - 0.04
Gain on sale of discontinued operations... - 0.04 0.71 0.04
Extraordinary loss........................ (0.07) - (0.07) -
Net income ............................... $ 1.09 $ 0.65 $ 2.38 $ 1.77
Dividends declared per common share........ $ 0.33 $ 0.33 $ 0.99 $ 0.99
*Amounts represent the weighted-average shares assuming dilution from the
potential exercise of stock options. Amounts are reduced by 13 million, 2
million, 15 million, and 5 million for the three month and nine month periods
ended September 30, 1998, and 1997, respectively, assuming no dilution.
See Notes to Consolidated Financial Statements
<PAGE>
AT&T Form 10-Q/A - Part I
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions Except Share Amounts)
(Unaudited)
September 30, December 31,
1998 1997
ASSETS
Cash and cash equivalents .............. $ 4,190 $ 318
Marketable securities................... - 307
Receivables, less allowances
of $1,029 and $988
Accounts receivable................... 8,979 8,675
Other receivables..................... 404 5,684
Deferred income taxes................... 1,398 1,252
Other current assets.................... 592 541
Total current assets.................... 15,563 16,777
Property, plant and equipment, net
of accumulated depreciation of
$24,718 and $22,233 .................. 25,093 24,203
Licensing costs, net of accumulated
amortization of $1,219 and $1,076..... 8,079 8,368
Investments............................. 3,430 3,866
Long-term receivables................... 671 1,794
Prepaid pension costs................... 2,022 2,156
Other assets............................ 3,303 2,830
Net assets of discontinued operation.... - 1,101
TOTAL ASSETS............................ $58,161 $61,095
(CONT'D)
<PAGE>
AT&T Form 10-Q/A - Part I
CONSOLIDATED BALANCE SHEETS (CONT'D)
(Dollars in Millions Except Share Amounts)
(Unaudited)
September 30, December 31,
1998 1997
LIABILITIES
Accounts payable....................... $ 5,768 $ 6,402
Payroll and benefit-related
liabilities.......................... 1,571 2,390
Debt maturing within one year.......... 1,009 4,085
Dividends payable...................... 581 538
Other current liabilities.............. 5,794 3,902
Total current liabilities.............. 14,723 17,317
Long-term debt......................... 6,079 7,857
Long-term benefit-related liabilities.. 4,825 3,142
Deferred income taxes.................. 5,075 5,711
Other long-term liabilities and
deferred credits..................... 3,392 3,390
Total liabilities ..................... 34,094 37,417
SHAREOWNERS' EQUITY
Common shares - par value $1 per share. 1,754 1,789
Authorized shares: 6,000,000,000
Outstanding shares:
1,753,668,000 at September 30, 1998;
1,789,013,000 at December 31, 1997
Additional paid-in capital............. 15,170 17,121
Guaranteed ESOP obligation............. (44) (70)
Retained earnings...................... 7,253 4,876
Accumulated other comprehensive
income............................... (66) (38)
Total shareowners' equity.............. 24,067 23,678
TOTAL LIABILITIES & SHAREOWNERS' EQUITY $58,161 $61,095
See Notes to Consolidated Financial Statements
<PAGE>
AT&T Form 10-Q/A - Part I
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(Dollars in Millions)
(Unaudited)
For the Nine Months Ended
September 30,
1998 1997
Common Shares
Balance at beginning of year............... $ 1,789 $ 1,774
Shares issued(acquired), net:
Under employee plans..................... 2 2
Under shareowner plans................... - -
For acquisitions......................... (37) 5
Balance at end of period..................... 1,754 1,781
Additional Paid-In Capital
Balance at beginning of year............... 17,121 16,624
Shares issued(acquired), net:
Under employee plans..................... 65 49
Under shareowner plans................... - 9
For acquisitions......................... (2,110) 89
Other.................................... 94 24
Balance at end of period..................... 15,170 16,795
Guaranteed ESOP Obligation
Balance at beginning of year............... (70) (96)
Amortization............................... 26 25
Balance at end of period..................... (44) (71)
Retained Earnings
Balance at beginning of year............... 4,876 2,790
Net income................................. 4,314 $4,314 3,153 $3,153
Dividends declared......................... (1,651) (1,609)
Treasury shares issued at less than cost... (289) (86)
Other changes.............................. 3 5
Balance at end of period..................... 7,253 4,253
Accumulated Other Comprehensive Income
Balance at beginning of year............... (38) -
Other comprehensive income
(net of taxes of ($57) and ($6)) ........ (28) (28) (22) (22)
Total Comprehensive Income................. $4,286 $3,131
Balance at end of period..................... (66) (22)
Total Shareowners' Equity.................... $24,067 $22,736
See Notes to Consolidated Financial Statements
<PAGE>
AT&T Form 10-Q/A - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
For the Nine
Months Ended
September 30,
1998 1997
Operating Activities
Net income ............................... $ 4,314 $ 3,153
Deduct: Income from discontinued
operations ..................... 10 155
Gain on sale of discontinued
operation....................... 1,290 -
Add: Extraordinary loss on retirement
of debt, net.................... 137 -
Income from continuing operations ........ 3,151 2,998
Adjustments to reconcile net income to
net cash provided by operating
activities of continuing operations:
Restructuring and other charges........ 2,732 -
Gains on sales......................... (770) (97)
Depreciation and amortization.......... 3,388 2,927
Provision for uncollectibles........... 1,050 1,185
Increase in accounts receivable........ (1,414) (974)
(Decrease)increase in accounts payable. (366) 173
Net increase in other operating
assets and liabilities............... (65) (439)
Other adjustments for noncash
items - net.......................... (865) (76)
Net cash provided by operating
activities of continuing operations..... 6,841 5,697
Investing Activities
Capital expenditures.................... (4,979) (5,088)
Proceeds from sale of
property, plant and equipment......... 56 78
Decrease in other receivables........... 6,403 434
Acquisitions of licenses, net........... (53) (402)
Sales of marketable securities.......... 2,003 408
Purchases of marketable securities...... (1,696) (117)
Equity investment distributions and sales 1,272 233
Equity investment contributions......... (86) (393)
Net dispositions, net of cash acquired.. 4,119 1,507
Other investing activities - net........ (74) (97)
Net cash provided by(used in) investing
activities of continuing operations..... 6,965 (3,437)
(CONT'D)
<PAGE>
AT&T Form 10-Q/A - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(Dollars in Millions)
(Unaudited)
For the Nine
Months Ended
September 30,
1998 1997
Financing Activities
Proceeds from long-term debt issuance.. 17 -
Retirements of long-term debt.......... (2,230) (631)
Acquisition of common shares - net..... (3,203) (11)
Dividends paid......................... (1,608) (1,605)
(Decrease)increase in short-term
borrowings - net..................... (3,030) 126
Other financing activities - net....... 28 45
Net cash used in financing activities
of continuing operations............... (10,026) (2,076)
Net cash provided by(used in)
discontinued operations................ 92 (12)
Net increase in cash and
cash equivalents....................... 3,872 172
Cash and cash equivalents
at beginning of year................... 318 196
Cash and cash equivalents
at end of period....................... $ 4,190 $ 368
See Notes to Consolidated Financial Statements
<PAGE>
AT&T Form 10-Q/A - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
(a) BASIS OF PRESENTATION
The consolidated financial statements have been prepared by AT&T
Corp. ("AT&T" or the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) and,
in the opinion of management, include all adjustments, necessary
for a fair statement of the consolidated results of operations,
financial position and cash flows for each period presented. The
consolidated results for interim periods are not necessarily
indicative of results for the full year. These financial results
should be read in conjunction with AT&T's Form 8-K filed on
October 16, 1998, which includes AT&T's restated consolidated
financial results for the year ended December 31, 1997, as well as
for the six months ended June 30, 1998. These financial results
were restated to reflect the July 23, 1998, merger with Teleport
Communications Group Inc. (TCG) which was accounted for as a
pooling of interests. In addition, these financial statements
should be read in conjunction with AT&T's Form 10-K for the year
ended December 31, 1997.
(b) RESTRUCTURING AND OTHER CHARGES
During the first quarter 1998 AT&T recorded a pre-tax charge of
$601 related to the Company's decision not to pursue Total Service
Resale (TSR) as a local service strategy. The Regional Operating
Companies have made it extremely difficult to enter the local
market under a TSR strategy. After spending several billions of
dollars in an attempt to enter this market, it became clear to
AT&T that both the economics and AT&T's ability to properly
service its customers were not acceptable. This has compelled AT&T
to exit TSR as a strategy for residential and certain business
markets. This decision was reached gradually - culminating with a
public announcement on January 26, 1998. A thorough financial and
operational review of that decision was conducted during the first
quarter resulting in an asset impairment recorded as of March 31,
1998. An impairment review was performed using the criteria
described in Statement of Financial Accounting Standards (SFAS)
No. 86 "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed." There were minimal revenues
associated with TSR which did not cover the direct costs
associated with servicing these customers. The TSR software was
designed and developed to uniquely support the TSR option and
cannot be utilized to support other connectivity options and
accordingly, a determination was made that the software was
impaired and should be written-off.
<PAGE>
AT&T Form 10-Q/A - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
Of the $601 charge, the software and software equipment write-offs
discussed above were $543 and $42, respectively. An additional $16
related to contractual obligations. AT&T was subject to certain
obligations and termination penalties under several vendor
contacts that were cancelled during the first quarter as a result
of this decision and, therefore, AT&T received no operational
benefit from the costs incurred under the contracts. All
obligations are expected to be settled in 1998.
It was noted during the first quarter 1998 review of the TSR exit
that certain fixed assets associated with the local initiative may
also be impaired. However, consideration was given to the
possibility of an alternative use for these assets pending the
merger with TCG, a local service provider. AT&T expects this to be
completed by year-end. Based on our findings to date over half of
the assets which were initially purchased for TSR can be utilized
elsewhere in AT&T. However, AT&T does expect an asset impairment
charge of approximately $50 to $100 in the fourth quarter of 1998
for assets which could not be utilized or disposed of at book
value.
During the second quarter 1998 AT&T recorded restructuring charges
of $2,743 primarily in connection with a plan, announced on
January 26, 1998, to reduce headcount by 15,000 to 18,000 over two
years as part of the Company's overall cost reduction program. In
connection with this plan, a voluntary retirement incentive
program (VRIP) was offered to eligible management employees.
Approximately 15,300 management employees accepted the VRIP offer.
The restructuring charges of $2,743 include a pre-tax charge of
$2,724 comprised of $2,412 for pension special termination
benefits and other costs and $312 for postretirement special
termination benefits and curtailment losses. AT&T originally
expected this amount to be partially offset by approximately $1.1
billion of gains to be recognized in the third and fourth quarters
of this year as employees' pension benefit obligations are
settled. In the third quarter 1998 we recognized a $602 gain
associated with the settlement of a portion of the pension
obligations. The amount of the gain to be recognized in the fourth
quarter is subject to market fluctuations, and therefore, the
initial amount forecasted for this gain is likely to change.
The second quarter restructuring charges of $2,743 also include
pre-tax charges of $125 for related facility costs and $150 for
executive separation costs. The second quarter charges were
partially offset by the reversal of $256 (pre-tax) of 1995
business restructuring reserves resulting from the overlap of the
VRIP acceptance rate on certain 1995 projects.
<PAGE>
AT&T Form 10-Q/A - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
Of the 15,300 employees who accepted the offer, 3,400 were already
included as part of previously established 1995 exit plans.
Because the benefit cost of the VRIP offer was greater than AT&T's
normal severance cost, AT&T had to increase its restructure
charge. This increase was accounted for by recording a $2.2
billion charge to reflect the 15,300 employees accepting the
offer, and the elimination of the original accrual of
approximately $200 AT&T had for the 3,400 employees under the 1995
plan. The balance of approximately $60 related to reserves which
were no longer deemed necessary based on the second quarter
review.
The special termination benefits reflect the value of pension
benefit improvements and expanded eligibility for
retirement-related benefits, such as medical, dental and life
insurance. The program permitted employees to choose either a
total lump sum distribution of their pension benefits or periodic
future annuity payments. The VRIP offer was formally distributed
to eligible management employees during the first week of April
and one's irrevocable acceptance had to be postmarked by May 22,
1998 to be valid. Employee exits were spread over three primary
dates in 1998, June 30, September 30, and December 30.
Substantially all employees terminating under the VRIP will be off
roll by December 30, 1998.
The VRIP offer was extended to employees who were participants in
the AT&T Management Pension Plan at any time from January 1, 1998
through January 21, 1998, inclusive, in a management position
lower than Executive level. The individual had to be either on the
active payroll or on an approved leave of absence with a
guaranteed right of reinstatement. Additionally, to be eligible
for the offer, the management employee had to meet the vesting
requirements of the AT&T Management Pension Plan by the date they
terminate employment.
The VRIP offer was generally announced to employees on January 26,
1998. During February, management employees received an electronic
mail message describing various details about the program. In
March, eligible employees received a more detailed written
overview of the program. Also in March, AT&T began to offer VRIP
seminars for eligible employees in an effort to reinforce the
content of the program. During the first week of April, detailed
VRIP offer packages, with estimates of employee-specific data,
were provided to employees eligible to participate.
<PAGE>
AT&T Form 10-Q/A - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
As of September 30, 1998, approximately 8,200 employees have
terminated employment under VRIP and AT&T has settled the pension
obligations covering about 8,000 of these employees. Related to
these exits, lump sum pension distributions totaling $2.6 billion,
which includes a portion of the special pension termination
benefits referred to above, have been made to these former
employees, resulting in a settlement gain of $602 recorded in the
third quarter. In addition, as of November 1, 1998, another 2,400
employees left the business under the VRIP. By December 31, 1998,
substantially all of the remaining VRIP participants will have
terminated employment and the associated settlement gain will be
recorded.
AT&T recorded a restructuring charge related to the exit of
certain businesses in the fourth quarter of 1995 as part of a
three year exit plan. The balance of the 1995 restructuring charge
as of September 30, 1998 is $315. This remaining balance is
primarily comprised of excess space or abandoned lease space in
various facilities and employee termination costs. In many cases
it was more appropriate, from an economic standpoint, to continue
to lease excess space until the lease contract expires than to pay
the penalties involved with early termination of the lease. The
remaining balance of employee termination costs primarily relates
to headcount reductions anticipated to occur by year-end.
AT&T expects the remainder of the projects supporting the 1995
reserve to be substantially complete by the end of 1998, which is
consistent with AT&T's original three-year restructuring plan.
AT&T is currently reviewing the status of all open projects and
will make appropriate adjustments to the reserve balance based on
that review.
AT&T also recorded $85 of TCG merger related expenses in the third
quarter. The net pre-tax benefit to AT&T was $517.
In the first three quarters of 1998 the net restructuring and
other charges discussed above totaled $2,827 pre-tax.
<PAGE>
AT&T Form 10-Q/A Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
(c) DISCONTINUED OPERATIONS
Pursuant to Accounting Principles Board Opinion No. 30 "Reporting
the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" (APB 30) the consolidated
financial statements of AT&T reflect the dispositions of AT&T's
submarine systems business (SSI) which was sold to Tyco
International Ltd. on July 1, 1997 for $850, and the sale of AT&T
Universal Card Services, Inc. (UCS) which was sold to Citibank on
April 2, 1998 for $3,500, as discontinued operations. The
after-tax gains resulting from the disposals were $66, or $0.04
per share for SSI and $1,290, or $0.71 per share for UCS.
Accordingly, the revenues, costs and expenses, assets and
liabilities, and cash flows of SSI and UCS have been excluded from
the respective captions in the Consolidated Statements of Income,
Consolidated Balance Sheets and Consolidated Statements of Cash
Flows, and have been reported through their respective dates of
disposition as "Income from discontinued operations," net of
applicable income taxes; as "Net assets of discontinued
operations"; and as "Net cash provided by discontinued
operations."
Summarized financial information for discontinued operations is as
follows:
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1998 1997 1998 1997
Revenues $ - $ 376 $ 365 $1,564
Income before
income taxes - 26 16 138
Net income $ - $ 20 10 89
At September At December
30, 1998 31, 1997
Current assets $ - $7,734
Total assets - 7,808
Current liabilities* - 5,602
Total liabilities* - 6,707
Net assets of discontinued
operations $ - $1,101
*Current liabilities include $5,224 of debt maturing within one
year and total liabilities include an additional $1,093 of
long-term debt at December 31, 1997, both of which were payable to
AT&T. On April 2, 1998, we received $5,722 as settlement of these
receivables from UCS.
No interest expense was allocated to discontinued operations in
1998 or 1997 due to the immateriality of the amounts; however, UCS
<PAGE>
AT&T Form 10-Q/A - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
recorded direct interest expense of $85 for the nine month period
ended September 30, 1998 and $75 and $216 for the three and nine
month periods ended September 30, 1997, respectively.
(d) RECLASSIFICATION
We have reclassified certain prior period amounts to conform with
our current presentation.
(e) TELEPORT COMMUNICATIONS GROUP INC. MERGER
On July 23, 1998, AT&T completed the merger with TCG, pursuant to
an agreement and plan of merger dated January 8, 1998. Each share
of TCG common stock was exchanged for 0.943 of AT&T common stock
resulting in the issuance of 181.6 million shares in the
transaction. The merger was accounted for as a pooling of
interests, and accordingly, AT&T's results of operations,
financial position and cash flows have been restated to reflect
the merger. In the third quarter of 1998, we recognized $85 of
merger related expenses.
(f) TELE-COMMUNICATIONS, INC. ACQUISITION
On June 24, 1998, AT&T signed a definitive merger agreement with
TCI for an all-stock transaction. Under the agreement, AT&T will
issue 0.7757 shares of AT&T common stock for each share of TCI
Group Series A common stock and 0.8533 shares of AT&T common stock
for each share of TCI Group Series B stock. The transaction, which
is subject to regulatory, shareowner and other approvals, is
expected to be completed in the first half of 1999. Also announced
was TCI's intention to combine Liberty Media Group, its
programming arm, and TCI Ventures Group, its technology
investments unit, to form the new Liberty Media Group. Upon
closing of the AT&T/TCI merger, the shareowners of the new Liberty
Media Group will be issued separate tracking stock by AT&T in
exchange for the shares currently held in Liberty Media Group and
TCI Ventures Group.
<PAGE>
AT&T Form 10-Q/A - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
(g) JOINT VENTURE WITH BRITISH TELECOMMUNICATIONS PLC (BT)
AT&T and BT announced on July 26, 1998, that they will create a
global venture to serve the complete communications needs of
multinational companies and the international calling needs of
individuals and businesses around the world. The venture, which
will be owned equally by AT&T and BT, will combine trans-border
assets and operations of each company, including their existing
international networks, all of their international traffic, all of
their trans-border products for business customers -- including an
expanding set of Concert services -- and AT&T and BT's
multinational accounts in selected industry sectors. The formation
of the venture is subject to certain conditions, including receipt
of regulatory approvals. The transaction is expected to be
completed by mid 1999. As a result of the joint venture agreement,
AT&T will be required to exit certain operations which may be
determined to compete directly with BT. A full review is currently
underway to determine the size and scope of any related
international restructuring charges. Management expects to have
definitive plans in place by the end of 1998, and accordingly, a
restructuring charge associated with this review will be
forthcoming in the fourth quarter.
(h) EXTRAORDINARY LOSS
In August 1998, AT&T extinguished $1,046 of debt associated with
the TCG pooling. This early extinguishment of debt was recorded as
an extraordinary loss and resulted in a $217 pre-tax loss. The
after-tax impact was $137, or $0.07 per diluted share. This debt
reduction will produce significant savings in interest expense
over time.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
On July 23, 1998, AT&T Corp. ("AT&T" or the "Company") completed the merger with
Teleport Communications Group Inc. (TCG). Each share of TCG common stock was
exchanged for 0.943 of AT&T common stock resulting in an issuance of 181.6
million shares in the transaction. The merger was accounted for as a pooling of
interests, and accordingly, AT&T's historical financial statements have been
restated to reflect the combined results of AT&T and TCG.
Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" (APB
30) the consolidated financial statements of AT&T reflect the dispositions of
AT&T's submarine systems business (SSI), which was sold to Tyco International
Ltd. on July 1, 1997, and the sale of Universal Card Services, Inc. (UCS) which
was sold to Citibank on April 2, 1998, as discontinued operations. Accordingly,
the revenues, costs and expenses, assets and liabilities, and cash flows of SSI
and UCS have been excluded from the respective captions in the Consolidated
Statements of Income, Consolidated Balance Sheets and Consolidated Statements of
Cash Flows, and have been reported through their respective dates of disposition
as "Income from discontinued operations", net of applicable income taxes; as
"Net assets of discontinued operations"; and as "Net cash provided by
discontinued operations."
AT&T's results of operations are discussed and analyzed for consolidated AT&T,
as well as by business segment: business services, consumer services, wireless
services, and other and corporate. Supplemental information is also included for
local services, new wireless services businesses, AT&T Solutions, WorldNet and
other on-line services, and international operations and ventures. Earnings
before interest and taxes (EBIT), and earnings before interest, taxes,
depreciation and amortization (EBITDA), total assets and other related
information is discussed for the consolidated results of AT&T and by business
segment.
AT&T defines EBIT as operating income plus other income and is a measure used by
our chief operating decision makers to measure AT&T's consolidated operating
results before interest and taxes and to measure segment profitability. Interest
and taxes are not allocated to our segments because debt is managed and serviced
and taxes are managed and calculated at the consolidated level. Trends in
interest and taxes are discussed separately on a consolidated basis. Management
believes EBIT is a meaningful measure to disclose to investors because it
provides investors with an analysis within MD&A of operating results using the
same measures used by the chief operating decision makers of AT&T, provides a
return on total capitalization measure and it allows investors a means to
evaluate the financial results of each segment to consolidated AT&T. EBIT may or
may not be consistent with the calculation of EBIT for other public companies
and EBIT should not be viewed by investors as an alternative to GAAP measures of
income as a measure of performance or to cash flows from operating, investing
and financing activities as a measure of liquidity.
EBITDA is also used by management as a measure of segment performance and is
defined as EBIT plus depreciation and amortization. We believe it is meaningful
to investors as a measure of each segment's liquidity and allows investors to
evaluate segments liquidity using the same measure as is used by the chief
operating decision makers of AT&T. Consolidated EBITDA is also provided for
comparison purposes. EBITDA may or may not be consistent with the calculation of
EBITDA for other public companies and should not be viewed by investors as an
alternative to GAAP measures of income as a measure of performance or to cash
flows from operating, investing and financing activities as a measure of
liquidity. In addition, EBITDA does not take into effect changes in certain
assets and liabilities which can effect cash flow.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Three months
ended
September 30, Change
$ in millions, except per share amounts 1998 1997 $ %
Total revenues............................$ 13,653 $13,090 $ 563 4.3%
OTHER INCOME STATEMENT ITEMS*
Operating income.......................... 3,312 1,747 1,565 89.7%
Operating margin.......................... 24.3% 13.3%
Income from continuing operations......... 2,096 1,078 1,018 94.4%
Diluted earnings per share,
continuing operations...................$ 1.16 $ 0.60 $ 0.56 93.3%
OTHER DATA*
EBIT...................................... 3,468 1,879 1,589 84.6%
EBITDA....................................$ 4,676 $ 2,914 $ 1,762 60.5%
Nine months
ended
September 30, Change
$ in millions, except per share amounts 1998 1997 $ %
Total revenues............................$ 39,695 $38,674 $ 1,021 2.6%
OTHER INCOME STATEMENT ITEMS*
Operating income.......................... 4,144 4,845 (701) (14.5)%
Operating margin.......................... 10.4% 12.5%
Income from continuing operations......... 3,151 2,998 153 5.1%
Diluted earnings per share,
continuing operations...................$ 1.74 $ 1.69 $ 0.05 3.0%
OTHER DATA*
EBIT...................................... 5,313 5,216 97 1.9%
EBITDA.................................... 8,744 8,193 551 6.7%
CASH FLOW:
Provided by operating activities.........$ 6,841 $ 5,697 $ 1,144 20.1%
Provided by(used in) investing activities. 6,965 (3,437) 10,402 302.6%
Used in financing activities.............$(10,026) $(2,076) $(7,950) (382.9)%
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
* Operating income in the third quarter of 1998 included a net pre-tax
benefit of $517 million, or approximately $0.16 per diluted share, which
consisted of a $602 million gain from pension settlements related to the
voluntary retirement incentive program (VRIP), partially offset by $85
million of TCG merger related expenses.
Operating income for the first nine months of 1998 included $2,827
million of restructuring and other charges, with an after-tax diluted
earnings per share reduction of approximately $0.98. The year to date
charges include a $601 million first quarter asset impairment charge, a
$2,743 million second quarter net restructuring charge and a $517 million
third quarter net benefit as described above. EBIT for the nine months
ended September 30, 1998, also included pre-tax gains on the sales of LIN
Television Corporation (LIN-TV) of $317 million, AT&T Solutions Customer
Care of $350 million and AT&T's investment in SmarTone Telecommunications
Holdings Limited (SmarTone) of $103 million. After taxes, these gains
totaled approximately $0.27 per diluted share.
Operating income for the nine months ended September 30, 1997, contained
a $160 million charge, or a reduction of approximately $0.05 per diluted
share, for exiting the two-way messaging business and a $100 million
benefit, or approximately $0.03 per diluted share, from the reversal of
pre-1995 restructuring charges. In addition, EBIT also included a $97
million pre-tax gain, or approximately $0.03 per diluted share, on the
sale of AT&T Skynet Satellite Services (Skynet).
Revenues from continuing operations increased $563 million, or 4.3%, in the
third quarter of 1998 compared with the same period in 1997. Long-distance
services revenues were essentially flat compared with the third quarter of 1997,
while calling volume increased 3.1%. Revenues from continuing operations
increased $1,021 million, or 2.6%, for the nine months ended September 30, 1998,
compared with the same period in 1997. Long-distance services revenues were
essentially flat compared with the first nine months of 1997, while calling
volume increased 4.1%.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Operating income increased $1,565 million, or 89.7%, to $3,312 million in the
third quarter of 1998 compared with the same period in 1997. For the third
quarter of 1998, operating margin showed improvement of 1,100 basis points
compared with the third quarter of 1997. EBIT increased $1,589 million, or
84.6%, to $3,468 million from $1,879 million in the third quarter of 1997.
Excluding the impact of the 1998 net gain mentioned above, operating income
increased $1,048 million, or 60.0%, to $2,795 million and operating margin
improved 720 basis points. Excluding the 1998 net gain, EBIT increased $1,072
million, or 57.0%, to $2,951 million. These increases were primarily due to the
Company's cost reduction efforts as well as the effect of higher revenues.
Operating income decreased $701 million, or 14.5%, to $4,144 million for the
nine months ended September 30, 1998, compared with the same period in 1997. For
the nine months ended September 30, 1998, operating margin decreased 210 basis
points compared with the first nine months of 1997. EBIT increased $97 million,
or 1.9%, to $5,313 million, from $5,216 million in the first nine months of
1997.
Excluding the impact of the gains, charges and reserve reversal mentioned above,
operating income increased $2,066 million, or 42.1%, to $6,971 million and
operating margin increased 490 basis points. Excluding the gains, charges and
reserve reversal, EBIT increased $2,191 million, or 42.3%, to $7,370 million.
These increases were primarily due to the net impact of higher revenues, the
Company's cost reduction efforts, and lower access and other interconnection
expenses, partially offset by higher depreciation and amortization expenses,
which reflect our continued high levels of capital expenditures.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In the third quarter of 1998 earnings per share from continuing operations was
$1.16, an increase of $0.56, or 93.3%, compared with earnings per share of $0.60
for the same period in 1997. For the nine months ended September 30, 1998,
earnings per share from continuing operations was $1.74, an increase of $0.05,
or 3.0%, compared with earnings per share of $1.69 for the same period in 1997.
In the third quarter of 1998, excluding the impact of the net gain, earnings per
share from continuing operations was approximately $1.00, an increase of
approximately $0.40, or 66.7%, from the same period in 1997. For the nine months
ended September 30, 1998, excluding the gains, charges and reserve reversal,
earnings per share from continuing operations was approximately $2.45, an
increase of approximately $0.77, or 45.8%, from the same period in 1997.
RESULTS OF OPERATIONS
Three months
ended
September 30, Change
$ in millions 1998 1997 $ %
REVENUES
Business services..........................$ 5,823 $ 5,561 $ 262 4.7%
Consumer services.......................... 5,806 5,977 (171) (2.9)%
Wireless services.......................... 1,420 1,190 230 19.4%
Other and corporate........................ 913 692 221 31.8%
Eliminations............................... (309) (330) 21 6.4%
Total revenues.............................$13,653 $13,090 $ 563 4.3%
Nine months
ended
September 30, Change
$ in millions 1998 1997 $ %
REVENUES
Business services..........................$17,196 $16,545 $ 651 3.9%
Consumer services.......................... 17,089 17,778 (689) (3.9)%
Wireless services.......................... 3,897 3,461 436 12.6%
Other and corporate........................ 2,462 1,891 571 30.1%
Eliminations............................... (949) (1,001) 52 5.2%
Total revenues.............................$39,695 $38,674 $1,021 2.6%
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
REVENUES
Revenue from continuing operations increased $563 million, or 4.3%, in the third
quarter of 1998 compared with the third quarter of 1997. Revenue growth for
business services, wireless services and corporate and other were partially
offset by a decline in revenue from consumer services. Long-distance services
revenues were essentially flat as calling volume increased 3.1%.
For the first nine months of 1998, revenues from continuing operations increased
$1,021 million, or 2.6%, compared with the same period in 1997. Increases in
business services, other and corporate and wireless services revenues were
partially offset by a decline in consumer services revenue. Long-distance
services revenues were essentially flat for the nine months ended September 30,
1998, compared with the same period in 1997 as calling volume increased 4.1%.
OPERATING EXPENSES
Access and other interconnection expenses decreased $156 million, or 3.9%, to
$3,819 million in the third quarter of 1998 compared with the third quarter of
1997. Access and other interconnection expenses for the nine months ended
September 30, 1998, decreased $839 million, or 6.7%, to $11,649 million compared
with the same period in 1997. The declines relate primarily to reductions in per
minute access expenses and AT&T's continuing efforts to manage access costs, and
to declines in international settlement rates. These reductions were largely
offset by Primary Interexchange Carrier Charges (PICC), AT&T's contribution to
the Universal Service Fund (USF) and volume increases. Access and other
interconnection expenses as a percentage of long-distance services revenues were
33.0% in the third quarter of 1998 and 34.5% in the third quarter of 1997.
Access and other interconnection expenses as a percentage of long-distance
services revenues were 34.1% for the first nine months of 1998 and 36.4% for the
first nine months of 1997.
Network and other communication expenses increased $60 million, or 2.4%, to
$2,515 million in the third quarter of 1998 compared with the same period last
year. The increase was due primarily to higher wireless costs and higher
expenditures for wireless handsets primarily as a result of demand for Digital
One Rate plans. In addition, the increase reflects higher costs due to growth of
AT&T Solutions' services. These increases were partially offset by reduced rates
for payphone compensation and a lower provision for uncollectible expenses.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Network and other communications services expenses increased $201 million, or
2.9%, to $7,268 million for the first nine months of 1998 compared with the same
period of 1997. The increase was due primarily to higher wireless costs and
higher expenditures for wireless handsets primarily as a result of demand for
Digital One Rate plans. In addition, the increase reflects higher costs due to
growth in AT&T Solutions' services. These increases were partially offset by a
lower provision for uncollectibles, lower costs as a result of the sale of AT&T
Solutions Customer Care in the first quarter of 1998, reduced rates for payphone
compensation and the two-way messaging charge recorded in the first quarter of
1997.
Depreciation and amortization expenses for the third quarter of 1998 increased
$175 million, or 17.2%, from the third quarter of 1997. For the nine month
period ended September 30, 1998, depreciation and amortization expenses
increased $461 million, or 15.7%, from the same period in 1997. Excluding the
$80 million impact of the two-way messaging charge in the first quarter of 1997,
depreciation expense increased $541 million, or 19.0%, for the nine months ended
September 30, 1998, compared with the same period in 1997. The increases for the
quarter and the year to date periods were primarily due to continued high levels
of capital expenditures.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Selling, general and administrative (SG&A) expenses decreased $564 million, or
14.5%, in the third quarter of 1998 compared with the third quarter of 1997. For
the nine months ended September 30, 1998, SG&A expenses decreased $928 million,
or 8.2%, compared with the same period in 1997. The reduced level of expenses
reflects AT&T's efforts to achieve a best-in-class cost structure, including the
removal of $1.6 billion in SG&A expenses from the business in 1998 (excluding
TCG) and a 22% ratio of SG&A expenses to revenues by the end of 1999. Excluding
TCG, SG&A expenses declined $626 million, or 16.3%, for the quarter and $1,061
million, or 9.5%, for the first nine months of 1998 compared with the same
periods last year. The decreases were due primarily to savings from cost control
initiatives such as headcount reductions. Also contributing to the decrease in
SG&A expenses was a decline in marketing and sales costs relating to lower
customer acquisition costs. These declines were partially offset by increases in
wireless customer acquisition and migration costs and increased costs associated
with the year 2000 initiative. SG&A expenses as a percentage of total revenues
decreased to 24.4% in the third quarter of 1998 compared with 29.8% in the third
quarter of 1997. For the nine months ended September 30, 1998, SG&A expenses as
a percentage of total revenues decreased to 26.2% for the first nine months of
1998 compared with 29.3% for the first nine months of 1997.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
During the third quarter of 1998 AT&T recorded a net pre-tax benefit of $517
million, or approximately $0.16 per share, which consisted of a $602 million
gain from pension settlements related to VRIP, partially offset by $85 million
of TCG merger related expenses.
During the second quarter of 1998 AT&T recorded restructuring and other charges
of $2,743 million, or approximately $0.94 per share, primarily in connection
with a plan, announced on January 26, 1998, to reduce headcount by 15,000 to
18,000 over two years as part of the Company's overall cost reduction program.
In connection with this plan, a voluntary retirement incentive program (VRIP)
was offered to eligible management employees. Approximately 15,300 management
employees accepted the VRIP offer. The restructuring charges of $2,743 million
include a pre-tax charge of $2,724 million, comprised of $2,412 million for
pension special termination benefits and other costs and $312 million for
postretirement special termination benefits and curtailment losses. AT&T
originally estimated this amount to be partially offset by approximately $1.1
billion of gains to be recognized in the third and fourth quarters of this year
as employees' pension benefit obligations are settled. The amount of gains to be
recognized in future periods is subject to market fluctuations, and therefore,
the initial amount forecasted for this gain is likely to change.
The second quarter restructuring charges of $2,743 million also include pre-tax
charges of $125 million for facility costs and $150 million for executive
separation costs. The second quarter charges were partially offset by the
reversal of $256 million (pre-tax) of 1995 business restructuring reserves
primarily resulting from the overlap of VRIP on certain 1995 projects.
In the first quarter of 1998 AT&T recorded a $601 million charge, or a reduction
of approximately $0.21 per share, related to the Company's decision not to
pursue Total Service Resale (TSR) as a local service strategy. The pre-tax
charge includes a $543 million write-down of software, $42 million primarily
related to equipment associated with the software platform and $16 million for
the termination of certain contracts. The Company's in-market experiences and
results have proven that the TSR solution is not economically viable for the
short-term or the long-term.
In the first three quarters of 1998, the net restructuring and other charges
discussed above totaled $2,827 million pre-tax, or a net reduction to earnings
per share of approximately $0.98.
AT&T continues its financial and operational review of the various alternatives
for entering the local market, including the impacts associated with the merger
with TCG and the pending merger with Tele-Communications, Inc. (TCI). In
addition, certain fixed assets which were purchased as part of the local
initiative are currently being evaluated in conjunction with the TCG merger to
determine if any assets are impaired. Management expects to complete this review
by the end of the fourth quarter.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OTHER INCOME STATEMENT ITEMS
Other income-net increased $24 million, or 18.4%, to $156 million in the third
quarter of 1998 compared with the same period in 1997. The increase was due
primarily to an increase in interest income on temporary cash investments,
partially offset by decreases in net equity earnings from investments and other
miscellaneous transactions, none of which are individually significant. The
increase in interest income is due to cash received from Citibank on April 2,
1998, related to the sale of UCS.
For the nine months ended September 30, 1998, other income-net increased $798
million, or 214.9%, to $1,169 million compared with the same period in 1997. The
increase was due primarily to pre-tax gains associated with the strategy of
exiting non-strategic businesses. In 1998, we recorded gains on the sales of
AT&T Solutions Customer Care of $350 million, LIN-TV of $317 million and
SmarTone of $103 million, as well as an increase in interest income on temporary
cash investments due to the cash received from Citibank for the sale of UCS.
These increases were partially offset by the $97 million pre-tax gain on the
sale of Skynet in 1997.
Interest expense increased $39 million, or 53.9%, in the third quarter of 1998
compared with the same period in 1997. Interest expense increased $81 million,
or 33.9%, for the nine months ended September 30, 1998, compared with the same
period in 1997. These increases were mainly due to the reclassification of
interest expense from discontinued operations to continuing operations resulting
from AT&T not retiring all of the UCS related debt upon the sale of UCS. The
$1,046 million debt reduction in the third quarter of 1998 will produce
significant savings in interest expense over time.
The provision for income taxes increased $532 million, or 73.3%, to $1,258
million in the third quarter of 1998 compared with the third quarter of 1997
primarily due to the increase in earnings before taxes partially offset by a
lower effective tax rate. The effective income tax rate decreased to 37.5% in
the third quarter of 1998 from 40.3% in the third quarter of 1997. The third
quarter 1997 effective tax rate was impacted by the tax impacts of certain 1997
investment dispositions and the pooling of TCG's historical operating results.
The restructuring and other charges for the third quarter of 1998 did not have a
significant impact on the overall effective tax rate.
The provision for income taxes decreased $137 million, or 6.9%, to $1,840
million for the nine months ended September 30, 1998, compared with the same
period in 1997. The decrease was due primarily to a lower effective tax rate.
The effective tax rate for the nine months ended September 30, 1998, was 36.9%,
a decrease of 280 basis points from 39.7% for the nine months ended September
30, 1997. The decrease in the effective tax rate was principally due to the tax
impacts of certain investment dispositions and certain foreign legal entity
restructurings. For the first nine months of 1998 the restructuring and other
charges did not have a significant impact on the overall effective tax rate.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Income from discontinued operations decreased $20 million and $79 million for
the three month and nine month periods ended September 30, 1998, compared with
the same periods of 1997. In 1998 the results of discontinued operations
included the results of UCS. In 1997 the results of discontinued operations
included the results of both UCS and SSI. On July 1, 1997, AT&T sold SSI for
$850 million, resulting in a after-tax gain of $66 million, or $0.04 per share.
On April 2, 1998, AT&T sold UCS for $3,500 million, resulting in an after-tax
gain of $1,290 million, or $0.71 per share.
In August 1998, AT&T extinguished $1,046 million of debt associated with the TCG
pooling. This early extinguishment of debt was recorded as an extraordinary loss
and resulted in a $217 million pre-tax loss. The after-tax impact was $137
million, or $0.07 per share. This debt reduction will produce significant
savings in interest expense over time.
SEGMENT RESULTS
AT&T'sresults are segmented according to the Company's primary lines of
business: business services, consumer services, and wireless services. A fourth
segment, identified as other and corporate, includes the results of AT&T
Solutions, TCG, international operations and ventures, on-line services such as
AT&T WorldNet Internet access, and various other items. The results of these
four segments plus the impact of the elimination of internal business sum to
AT&T's total results. The following is a discussion of each of these segments,
as well as supplemental information on local services, new wireless services
businesses, AT&T Solutions, WorldNet and other on-line services, and
international operations and ventures.
AT&T defines EBIT as operating income plus other income and is a measure used by
our chief operating decision makers to measure AT&T's consolidated operating
results before interest and taxes and to measure segment profitability. Interest
and taxes are not allocated to our segments because debt is managed and serviced
and taxes are managed and calculated at the consolidated level. Trends in
interest and taxes are discussed separately on a consolidated basis. Management
believes EBIT is a meaningful measure to disclose to investors because it
provides investors with an analysis within MD&A of operating results using the
same measures used by the chief operating decision makers of AT&T, provides a
return on total capitalization measure and it allows investors a means to
evaluate the financial results of each segment to consolidated AT&T. EBIT may or
may not be consistent with the calculation of EBIT for other public companies
and EBIT should not be viewed by investors as an alternative to GAAP measures of
income as a measure of performance or to cash flows from operating, investing
and financing activities as a measure of liquidity.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
EBITDA is also used by management as a measure of segment performance and is
defined as EBIT plus depreciation and amortization. We believe it is meaningful
to investors as a measure of each segment's liquidity and allows investors to
evaluate segments liquidity using the same measure as is used by the chief
operating decision makers of AT&T. Consolidated EBITDA is also provided for
comparison purposes. EBITDA may or may not be consistent with the calculation of
EBITDA for other public companies and should not be viewed by investors as an
alternative to GAAP measures of income as a measure of performance or to cash
flows from operating, investing and financing activities as a measure of
liquidity. In addition, EBITDA does not take into effect changes in certain
assets and liabilities which can effect cash flow.
Total assets for each segment include all assets, except interentity
receivables. Deferred taxes, prepaid pension assets, and corporate-owned or
leased real estate are held at the corporate level and therefore are included in
the other and corporate segment. Shared network assets are allocated to the
segments based on the prior three years' volumes and are reallocated each
January.
BUSINESS SERVICES
Business services results reflect sales of long-distance services (domestic and
international, inbound and outbound, inter- and intraLATA toll services, calling
card and operator-handled services, data services, messaging and other network
enabled services), local services and web hosting and other electronic commerce
services.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Three months
ended
September 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 5,823 $ 5,561 $ 262 4.7%
EBIT................................. 1,471 1,110 361 32.5%
EBITDA............................... 2,042 1,565 477 30.5%
OTHER ITEMS
Capital additions....................$ 1,292 $ 1,144 $ 148 13.0%
Nine months
ended
September 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$17,196 $ 16,545 $ 651 3.9%
EBIT................................. 3,850 3,354 496 14.8%
EBITDA............................... 5,451 4,636 815 17.6%
OTHER ITEMS
Capital additions....................$ 3,009 $ 2,448 $ 561 22.9%
At Sept. 30, At Dec. 31, Change
1998 1997 $ %
Total assets*........................$16,782 $ 15,030 $1,752 11.7%
* Includes allocated shared network assets of $11,417 and $10,246 at September
30, 1998, and December 31, 1997, respectively.
REVENUE
Business services revenue in the third quarter increased $262 million, or 4.7%,
compared with the third quarter of 1997. Business services revenue grew to
$17,196 million in the nine months ended September 30, 1998, compared with
$16,545 million for the nine months ended September 30, 1997, an increase of
$651 million, or 3.9%. Adjusted for the sales of Tridom and Skynet, revenue grew
4.3%, for the nine months ended September 30, 1998, compared with the same
period in 1997, although growth was tempered by an outage in AT&T's frame relay
network in April 1998. Data services led the growth in business services revenue
with an increase in the high-teens for the three month period and in the
mid-teens for the nine month period ended September 30, 1998.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Long-distance services revenue for the third quarter of 1998 increased 4.4%
compared with the third quarter of 1997. Long-distance calling volume increased
at a mid-single digit rate for the quarter. For the nine months ended September
30, 1998, long-distance services revenue increased 3.7% compared with the same
period in 1997 with a high-single digit increase in long-distance calling
volume. The volume increases for both periods were led by growth in inbound
calling.
Voice-related revenue for the three and nine months ended September 30, 1998,
was essentially flat compared with the same periods last year, as volume growth
continued to be offset by declines in average revenue per minute. For the third
quarter, price declines have occurred due primarily to changes in product mix,
competitive forces and growth in lower-priced minutes. For the nine months ended
September 30, 1998, price declines have occurred due primarily to competitive
forces, changes in product mix and growth in lower-priced minutes. Lower volumes
of higher priced card and operator-handled services, which are increasingly
being replaced by wireless services, also contributed to the decline in average
revenue per minute.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
EBIT/EBITDA
EBIT increased to $1,471 million, or 32.5%, in the third quarter of 1998 from
$1,110 million in the same period of 1997. EBITDA increased to $2,042 million,
or 30.5%, in the third quarter of 1998 from $1,565 million in the same period
last year. EBIT increased to $3,850 million, or 14.8%, for the nine months ended
September 30, 1998, from $3,354 million in the same period in 1997. EBITDA
increased to $5,451 million, or 17.6%, for the first nine months of 1998 from
$4,636 million for the nine months ended September 30, 1997. Excluding the first
quarter 1997 gain on the sale of Skynet, EBIT increased $593 million, or 18.2%,
and EBITDA increased $912 million, or 20.1%, for the first nine months of 1998.
These increases were driven by growth in revenues as well as progress toward
AT&T's company-wide cost reduction goals. In particular, streamlining of
customer care and sales support functions, including significant headcount
reductions contributed to the increases.
OTHER ITEMS
Capital additions increased $148 million, or 13.0%, in the third quarter of 1998
compared with the third quarter of 1997. For the nine months ended September 30,
1998, capital additions increased $561 million, or 22.9%, compared with the same
period in 1997. Capital additions for the first nine months of 1998 include
investments in AT&T's SONET program, data networks, and the AT&T Digital Link
product for local service.
Total assets increased $1,752 million, or 11.7%, to $16,782 million at September
30, 1998, from December 31, 1997. The increase was primarily due to 1998 capital
expenditures and the reallocation of shared network assets, partially offset by
current year depreciation.
CONSUMER SERVICES
Consumer services results reflect sales of long-distance services (including
domestic and international, inter- and intraLATA toll services, calling card and
operator handled calling, and prepaid calling cards) and local service to
certain residential customers.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Three months
ended
September 30, Change
$ in millions 1998 1997 $ %
Revenue.............................$ 5,806 $ 5,977 $ (171) (2.9)%
EBIT................................ 1,755 1,330 425 32.0%
EBITDA.............................. 1,930 1,550 380 24.7%
OTHER ITEMS
Capital additions...................$ 103 $ 239 $ (136) (56.9)%
Nine months
ended
September 30, Change
$ in millions 1998 1997 $ %
Revenue.............................$17,089 $17,778 $ (689) (3.9)%
EBIT................................ 4,647 3,572 1,075 30.1%
EBITDA.............................. 5,166 4,158 1,008 24.3%
OTHER ITEMS
Capital additions...................$ 243 $ 558 $ (315) (56.5)%
At September 30, At Dec. 31, Change
1998 1997 $ %
Total assets*.......................$ 6,743 $ 7,923 $(1,180) (14.9)%
* Includes allocated shared network assets of $2,969 and $4,168 at September 30,
1998, and December 31, 1997, respectively.
REVENUE
Consumer services revenue for the three months ended September 30, 1998,
deceased $171 million, or 2.9%, compared with the same period last year. For the
nine months ended September 30, 1998, revenues decreased $689 million, or 3.9%.
Calling volume decreased at a low-single-digit rate for both periods. The
decline in revenue for the three and nine months ended September 30, 1998,
reflected the impact of AT&T's strategy to focus on high value customers and
actively migrate them to more favorable calling plans. Revenue also continued to
be pressured as AT&T flowed through access charge reductions to customers. In
the third quarter, as part of the ongoing effort to pass through access charge
reductions, AT&T introduced a first minute free on Saturday program.
The controlled migration of customers to more favorable calling plans is a key
part of AT&T's strategy to attract and retain profitable customers in a cost
efficient manner. As a result of this strategy, AT&T now has over 25 million
customers on its One Rate plans, including more than 12 million on One Rate
Plus. In the quarter more than 75% of AT&T's consumer long-distance minutes were
generated by customers on optional calling plans. Also, the Company's emphasis
on high-value customers results in fewer customer acquisitions and a lower cost
structure. While this approach continues to restrain revenue and volume growth,
it is key to AT&T's strategy of optimizing its customer base.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Competition in domestic and international long-distance markets, including the
impact of dial around, contributed to the negative revenue and volume growth
rates, as did substitution of calling card and other higher-priced long-distance
services for wireless services. Reductions in international long-distance
pricing consistent with falling international settlement rates also contributed
to the decrease in revenue.
EBIT/EBITDA
For the three months ended September 30, 1998, EBIT increased $425 million, or
32.0%, to $1,755 million and EBITDA increased $380 million, or 24.7%, to $1,930
million. For the nine months ended September 30, 1998, EBIT increased $1,075
million, or 30.1%, to $4,647 million and EBITDA increased $1,008 million, or
24.3%, to $5,166 million. These increases were driven primarily by reduced SG&A
expenses. AT&T's focus on high-value customers has led to lower, yet more
productive customer acquisition and retention program spending. Simplification
and consolidation of marketing messages had also generated substantial
efficiencies, and consumer services has increased its use of alternate, more
efficient distribution channels. For example, One Rate On-line offers
activation, customer care and billing over the Internet with payment via credit
card.
OTHER ITEMS
Total assets decreased $1,180 million, or 14.9%, to $6,743 million at September
30, 1998, from December 31, 1997. The decrease was due primarily to the January
reallocation of shared network assets.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
WIRELESS SERVICES
Wireless services results include sales of wireless services and products to
customers in 850 MHz cellular markets and 1.9 GHz markets. Also included are the
results of the messaging, aviation communications, and wireless data divisions,
as well as the costs associated with the development of fixed wireless
technology. The impact of the new 1.9 GHz markets, wireless data, two-way
messaging and fixed wireless development are discussed as "new wireless services
businesses"; all other wireless results are reflected as "core" businesses.
TOTAL WIRELESS SERVICES
Three months
ended
September 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 1,420 $ 1,190 $ 230 19.4%
EBIT................................. 33 142 (109) (76.9)%
EBITDA............................... 324 367 (43) (11.6)%
OTHER ITEMS
Capital additions....................$ 221 $ 419 $(198) (47.2)%
Nine months
ended
September 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 3,897 $ 3,461 $ 436 12.6%
EBIT................................. 215 270 (55) (20.3)%
EBITDA............................... 1,035 990 45 4.6%
OTHER ITEMS
Capital additions....................$ 634 $ 1,542 $(908) (58.9)%
At Sept. 30, At Dec. 31, Change
1998 1997 $ %
Total assets.........................$18,047 $18,540 $(493) (2.7)%
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
REVENUE
Wireless services revenue grew $230 million, or 19.4%, in the third quarter of
1998 and $436 million, or 12.6%, for the nine months ended September 30, 1998,
compared with the same periods of 1997. The increases in both periods were
driven in part by the response to AT&T's Digital One Rate offer and new 1.9 GHz
markets. Interest in Digital One Rate helped generate 325 thousand net
subscriber additions during the third quarter of 1998, a 73.7% increase compared
with the same period last year, and slightly above the previous record set in
the second quarter of 1998. This was achieved in spite of the multi-network
phone shortage experienced during much of the third quarter.
Digital One Rate is one key element of our ongoing efforts to acquire and retain
profitable, high-value customers. Since the program's launch in May of this
year, over 500 thousand subscribers have signed on to this service. AT&T has
continued to add customers at a rate of approximately 100 thousand per month.
Over two thirds of these customers have represented new subscribers to AT&T. The
program was partially responsible for AT&T's higher revenue per user and minutes
of use per subscriber. In AT&T's 850 MHz markets, average revenue per user
(ARPU) increased to $58.0 in the third quarter of 1998 from $57.5 in the second
quarter of 1998. ARPU has now increased in two successive quarters.
Year-over-year ARPU declined 4.0%. Minutes of use per subscriber increased
within our 850 MHz markets to a 36% growth rate over the third quarter of 1997;
well above the 4% and 16% growth rates achieved in the first and second quarters
of 1998, respectively.
Migration of customers to digital service is another key element of AT&T's
wireless strategy. Digital service generates lower network costs and improves
customer retention. As of September 30, 1998, 53% of AT&T's 6.809 million
consolidated subscribers used digital service, up from 45% one quarter ago and
up from 24% at September 30, 1997. Including partnership markets, the Company
had 4.2 million digital subscribers at the end of the third quarter of 1998.
Total cellular customers served by companies in which AT&T has or shares a
controlling interest increased 17.4% to 9.148 million at September 30, 1998,
from 7.789 million at September 30, 1997.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
EBIT/EBITDA
EBIT and EBITDA were $33 million and $324 million, respectively, in the third
quarter of 1998, a decrease of $109 million and $43 million, or 76.9% and 11.6%,
from $142 million and $367 million, in the third quarter of 1997. For the first
nine months of 1998, EBIT was $215 million, a decrease of $55 million, or 20.3%,
from $270 million for the first nine months of 1997. For the first nine months
of 1998, EBITDA was $1,035 million, an increase of $45 million, or 4.6%, from
$990 million for the first nine months of 1997. Excluding the impacts of the
second quarter 1998 gain on the sale of SmarTone and the first quarter 1997
charge to exit the two-way messaging business, EBIT and EBITDA decreased $318
million, or 74.0% to $112 million, and $138 million, or 12.8% to $932 million,
respectively, for the first nine months of 1998. These decreases were due
primarily to higher losses for new wireless services businesses in the current
periods compared with the prior year periods.
EBIT and EBITDA for new wireless services businesses were negative $143 million
and negative $91 million for third quarter of 1998, compared with negative $97
million and negative $80 million for the third quarter of 1997. EBIT and EBITDA
for new wireless services businesses were negative $458 million and negative
$317 million for first nine months of 1998, compared with negative $356 million
and negative $243 million for the first nine months of 1997. Excluding the
impact of the first quarter 1997 charge to exit the two-way messaging business,
EBIT and EBITDA for new wireless services businesses decreased $262 million and
$154 million, respectively, for the first nine months of 1998 compared with the
first nine months of 1997. These declines were due primarily to the roll-out of
additional markets over the past twelve months.
Core EBIT and EBITDA were $176 million and $415 million in the third quarter of
1998, compared with $239 million and $447 million for the same period last year.
For the nine months ended September 30, 1998, core EBIT and EBITDA were $673
million and $1,352 million, compared with $626 million and $1,233 million for
the same period last year. The decreases in EBIT and EBITDA for the three months
ended September 30, 1998, compared with September 30, 1997, were primarily due
to incremental acquisition and migration costs associated with higher subscriber
additions and digital migrations. Excluding the impact of the second quarter
1998 gain on the sale of SmarTone, core EBIT and EBITDA were $570 million and
$1,249 million, for the nine months ended September 30, 1998. This decrease in
core EBIT for the nine months ended September 30, 1998, compared with the same
period last year was due primarily to an increase in network and other
communication services expenses, depreciation and amortization expenses and
lower equity earnings from non-consolidated subsidiaries, partially offset by
higher revenue. The increase in core EBITDA for the nine months ended September
30, 1998, compared with the same period last year was due primarily to higher
revenue partially offset by an increase in network and other communication
services expenses and lower equity earnings from non-consolidated subsidiaries.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OTHER ITEMS
Capital additions decreased $198 million to $221 million in the third quarter of
1998 compared with the same period last year. Capital additions decreased $908
million to $634 million for the nine month period ended September 30, 1998,
compared with $1,542 million for the same period in 1997. These decreases were
primarily due to the substantial completion of the majority of AT&T's 1.9 GHz
market buildouts in 1997. Capital spending for the year-to-date period ended
September 30, 1998, was directed primarily at expanding coverage in new and
traditional markets.
Total assets decreased $493 million, or 2.7%, from December 31, 1997. The
decrease was due primarily to a decrease in investments as a result of asset
dispositions in 1998 as well as a decrease in licensing costs due to the current
year amortization.
NEW WIRELESS SERVICES BUSINESSES
Three months
ended
September 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 121 $ 6 $ 115 NMF
EBIT................................. (143) (97) (46) (47.2)%
EBITDA............................... (91) (80) (11) (14.5)%
OTHER ITEMS
Capital additions....................$ 94 $ 248 $(154) (62.2)%
Nine months
ended
September 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 214 $ 11 $ 203 NMF
EBIT................................. (458) (356) (102) (28.6)%
EBITDA............................... (317) (243) (74) (30.4)%
OTHER ITEMS
Capital additions....................$ 293 $1,031 $(738) (71.5)%
At Sept. 30, At Dec. 31, Change
1998 1997 $ %
Total assets.........................$4,459 $4,417 $ 42 1.0%
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CORE WIRELESS SERVICES
Three months
ended
September 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 1,299 $ 1,184 $ 115 9.7%
EBIT................................. 176 239 (63) (26.2)%
EBITDA............................... 415 447 (32) (6.9)%
OTHER ITEMS
Capital additions....................$ 127 $ 171 $ (44) (25.2)%
Nine months
ended
September 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 3,683 $ 3,450 $ 233 6.8%
EBIT................................. 673 626 47 7.5%
EBITDA............................... 1,352 1,233 119 9.7%
OTHER ITEMS
Capital additions....................$ 341 $ 511 $ (170) (33.3)%
At Sept. 30, At Dec. 31, Change
1998 1997 $ %
Total assets.........................$13,588 $14,123 $ (535) (3.8)%
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OTHER AND CORPORATE
Other and corporate includes TCG, AT&T Solutions, international operations and
ventures, AT&T WorldNet, other businesses, and corporate operations.
Three months
ended
September 30, Change
$ in millions 1998 1997 $ %
Revenue................................$ 913 $ 692 $ 221 31.8%
EBIT................................... 218 (702) 920 131.5%
EBITDA................................. 389 (567) 956 169.2%
OTHER ITEMS
Capital additions......................$ 347 $ 330 $ 17 4.9%
Nine months
ended
September 30, Change
$ in millions 1998 1997 $ %
Revenue................................$ 2,462 $ 1,891 $ 571 30.1%
EBIT................................... (3,379) (1,977) (1,402) (71.0)%
EBITDA................................. (2,888) (1,588) (1,300) (82.0)%
OTHER ITEMS
Capital additions......................$ 986 $ 1,039 $ (53) (5.0)%
At Sept. 30, At Dec. 31, Change
1998 1997 $ %
Total assets...........................$ 16,589 $18,501 $(1,912) (10.3)%
REVENUE
In the third quarter of 1998, other and corporate revenue increased $221
million, or 31.8%, from the third quarter of 1997. The revenue growth in the
third quarter was driven by increased revenue from TCG and AT&T Solutions.
Revenue growth was partially offset by a decrease in revenue from AT&T Solutions
Customer Care, which was sold on March 3, 1998.
For the nine months ended September 30, 1998, other and corporate revenue
increased $571 million, or 30.1%, compared with the same period of 1997. The
revenue growth in the first nine months of 1998 compared with the same period in
1997 was primarily due to increases in TCG, AT&T Solutions, international
operations and ventures, and AT&T WorldNet. These increases were partially
offset by a decrease in revenue from AT&T Solutions Customer Care, which was
sold on March 3, 1998.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
EBIT/EBITDA
EBIT and EBITDA improved by $920 million, or 131.5%, and $956 million, or
169.2%, respectively, in the third quarter of 1998 compared with the third
quarter of 1997. Excluding the third quarter 1998 net gain, EBIT and EBITDA
improved by $403 million, or 57.3%, and $439 million, or 77.2%, respectively.
These quarter over quarter improvements were primarily due to increased interest
income from temporary cash investments, an improvement at AT&T Solutions,
reductions in corporate overhead, and an improvement at international operations
and ventures.
EBIT and EBITDA declined $1,402 million, or 71.0%, and $1,300 million, or 82.0%,
respectively, in the first nine months of 1998 compared with the nine months
ended September 30, 1997. Excluding the impact of the 1998 restructuring and
other charges, the 1998 gains on the sales of LIN-TV and AT&T Solutions Customer
Care, as well as the first quarter 1997 reversal of pre-1995 restructuring
charges, EBIT improved $858 million to negative $1,219 million and EBITDA
improved $960 million to negative $728 million, respectively. These improvements
for the nine months ended September 30, 1998, compared with the same period in
1997, were primarily due to increased interest income on temporary cash
investments, improvements at both international operations and ventures and AT&T
Solutions, reductions in corporate overhead and an improvement at AT&T WorldNet.
OTHER ITEMS
Total assets at September 30, 1998 were $16,589 million. This represents a
decrease of $1,912 million, or 10.3%, from December 31, 1997. The decrease is
due primarily to a decrease in other receivables due primarily to the repayment
of loans by UCS as part of the settlement for our April 2, 1998 sale of UCS to
Citicorp, partially offset by an increase in cash resulting from the remaining
proceeds from the sale of UCS.
ELIMINATIONS
Eliminations reflects the elimination of revenue and profit generated by the
sale of services between business segments. The sale of business long-distance
services to other AT&T units generates nearly all of the eliminated revenue.
Revenue eliminations for the third quarter of 1998 were $309 million, a 6.4%
decrease in eliminated revenues from the third quarter of 1997, due primarily to
the sale of AT&T Solutions Customer Care. EBIT and EBITDA were both negative $9
million for the third quarter of 1998.
Revenue eliminations for the nine months ended September 30, 1998, were $949
million, a 5.2% decrease in eliminated revenues from the same period last year,
due primarily to the sale of AT&T Solutions Customer Care. EBIT and EBITDA were
both negative $20 million for the nine months ended September 30, 1998.
SUPPLEMENTAL DISCLOSURES
LOCAL SERVICES
Local services for business and residential customers are included as part of
AT&T's business services, consumer services, and other and corporate segments.
Other and corporate includes TCG's local business (but excludes ACC Corp. (ACC))
and the costs associated with corporate staff dedicated to AT&T's local services
effort.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Three months
ended
September 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 247 $ 147 $ 100 67.4%
EBIT................................. (227) (248) 21 8.6%
EBITDA............................... (150) (187) 37 20.5%
OTHER ITEMS
Capital additions....................$ 283 $ 334 $ (51) (15.0)%
Nine months
ended
September 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 682 $ 372 $ 310 83.1%
EBIT................................. (1,261) (652) (609) (93.3)%
EBITDA............................... (1,028) (499) (529) (105.6)%
OTHER ITEMS
Capital additions....................$ 919 $ 779 $ 140 18.1%
At Sept. 30, At Dec. 31, Change
1998 1997 $ %
Total assets.........................$ 3,402 $4,068 $(666) (16.4)%
REVENUE
For the three months ended September 30, 1998, revenue increased $100 million,
or 67.4%, compared with the same period in 1997. For the nine months ended
September 30, 1998, revenue increased $310 million, or 83.1%, compared with the
same period in 1997. These increases were due to continued growth in the local
operations of TCG and AT&T Digital Link. Revenue growth for local operations of
TCG was driven by growth in private line, switch usage and facilities,
interconnection and data/Internet services.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
EBIT/EBITDA
For the three months ended September 30, 1998, EBIT improved $21 million, or
8.6%, compared with the same period in 1997. For the three months ended
September 30, 1998, EBITDA improved $37 million, or 20.5%, compared with the
same period in 1997. Excluding the impact of the third quarter 1998 TCG merger
related expenses, EBIT improved $106 million or 42.9% and EBITDA improved $122
million or 65.9%, respectively. These improvements were primarily due to revenue
growth in TCG and AT&T Digital Link combined with an improved cost structure.
For the nine months ended September 30, 1998, EBIT declined $609 million, or
93.3%, compared with the same period in 1997. For the nine months ended
September 30, 1998, EBITDA declined $529 million, or 105.6%, compared with the
same period in 1997. Excluding the impact of the first quarter 1998 asset
impairment charge and the third quarter 1998 TCG merger related expenses, EBIT
improved $77 million, or 11.9%, and EBITDA improved $157 million, or 31.7%.
These increases were driven by revenue growth, primarily in TCG, partially
offset by higher local connectivity costs due to increasing volume with more
access and subscriber lines than in 1997.
OTHER ITEMS
Capital additions were $283 million for the three months ended September 30,
1998, compared with $334 million in the same period last year. Capital additions
increased $140 million for the nine month period ended September 30, 1998,
compared with the same period last year. Capital spending for local services was
primarily related to expansion, development and construction of TCG's local
network.
Total assets were $3,402 million at September 30, 1998, a decrease of $666
million, or 16.4%, compared with December 31, 1997. The decrease was due
primarily to the first quarter write-down of software.
NEW WIRELESS SERVICES BUSINESSES
Information related to AT&T's new wireless services businesses is included in
the wireless services' segment discussion.
AT&T SOLUTIONS
AT&T Solutions is the Company's outsourcing and network management business. The
results of AT&T Solutions are included in the other and corporate segment.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Three months
ended
September 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 273 $ 204 $ 69 34.5%
EBIT................................. 16 (37) 53 142.7%
EBITDA............................... 53 1 52 NMF
OTHER ITEMS
Capital additions....................$ 42 $ 28 $ 14 52.3%
Nine months
ended
September 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 732 $ 546 $ 186 34.2%
EBIT................................. 3 (140) 143 101.9%
EBITDA............................... 109 (28) 137 488.8%
OTHER ITEMS
Capital additions....................$ 92 $ 65 $ 27 42.6%
At Sept. 30, At Dec. 31, Change
1998 1997 $ %
Total assets.........................$ 569 $ 576 $ (7) (1.2)%
REVENUE
For the three months ended September 30, 1998, revenue increased $69 million, or
34.5%, to $273 million, compared with the same period in 1997. For the nine
months ended September 30, 1998, revenue increased $186 million, or 34.2%, to
$732 million, compared with the same period in 1997. These increases were
primarily due to growth in outsourcing. During the third quarter we announced
the signing of a six year contract with Banc One, valued at $1.4 billion over
the contract term. The unit currently has more than $4 billion under contract to
be recognized over the related contract terms.
Although not included in the unit's revenue, AT&T Solutions also manages AT&T's
information technology infrastructure -- an operation that is valued at an
estimated $1.6 billion in internal billings annually. Total internal billings
for the quarter were $402 million and year-to-date were $1,182 million.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
EBIT/EBITDA
For the three months ended September 30, 1998, EBIT increased $53 million, or
142.7%, to $16 million, compared with the same period in 1997. EBITDA increased
$52 million, to $53 million, in the third quarter of 1998, compared with the
same period in 1997. For the nine months ended September 30, 1998, EBIT
increased $143 million, or 101.9%, to $3 million, compared with the same period
in 1997. EBITDA increased $137 million, or 488.8%, to $109 million, in the first
nine months of 1998, compared with the same period in 1997. The increases in
both EBIT and EBITDA for the quarter and year to date periods were due to the
net impact of revenue growth and cost reductions.
OTHER ITEMS
Total assets were $569 million at September 30, 1998. Approximately 50% of total
assets at September 30, 1998 were related to servicing the internal network
infrastructure of AT&T.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
WORLDNET AND OTHER ON-LINE SERVICES
WorldNet and other on-line services includes AT&T WorldNet Internet access
service for residential and business consumers (included in other and corporate)
as well as Worldwide Web site hosting and other electronic commerce services
(included in business services).
Three months
ended
September 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 100 $ 61 $ 39 65.1%
EBIT................................. (104) (124) 20 16.2%
EBITDA............................... (88) (117) 29 24.5%
OTHER ITEMS
Capital additions....................$ 13 $ 51 $(38) (73.5)%
Nine months
ended
September 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 262 $ 152 $110 72.7%
EBIT................................. (328) (435) 107 24.6%
EBITDA............................... (287) (414) 127 30.7%
OTHER ITEMS
Capital additions....................$ 32 $ 78 $(46) (58.4)%
At Sept. 30, At Dec. 31, Change
1998 1997 $ %
Total assets.........................$ 354 $ 334 $ 20 5.9%
REVENUE
For the three months ended September 30, 1998, revenue increased $39 million, or
65.1%, to $100 million compared with the same period in 1997. For the nine
months ended September 30, 1998, revenue increased $110 million, or 72.7%, to
$262 million compared with the nine months ended September 30, 1997. The
increases were primarily due to continued growth in AT&T WorldNet's residential
subscriber base and higher average revenue per subscriber, which was primarily
due to the expiration of AT&T WorldNet's free-pricing promotion that was offered
in 1997. WorldNet had 1.156 million subscribers at September 30, 1998, up from
.963 million at September 30, 1997. This is an increase of 20.0% compared with
the prior year. Average revenue per customer continued to increase due to the
expiration of AT&T WorldNet's initial promotional price programs in favor of
regular monthly rates of $9.95 and $19.95. AT&T Web Site Services had
approximately 9 thousand hosted sites at the end of the third quarter of 1998
compared with 5 thousand at the end of the third quarter of 1997.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
AT&T continues to explore new ways of growing its Internet access business,
primarily through AT&T WorldNet and other on-line businesses.
EBIT/EBITDA
For the three months ended September 30, 1998, EBIT improved $20 million, or
16.2%, to negative $104 million, compared with the same period in 1997. For the
three months ended September 30, 1998, EBITDA improved $29 million, or 24.5%, to
negative $88 million, compared with the same period in 1997. These increases
were driven by revenue growth in AT&T WorldNet, partially offset by higher
network costs which were driven by an increase in the residential subscriber
base.
For the nine months ended September 30, 1998, EBIT improved $107 million, or
24.6%, to negative $328 million compared with the same period last year. This
improvement was driven by AT&T WorldNet revenue growth and decreased marketing
and sales expense in EasyLink, partially offset by higher depreciation expense
as a result of the expansion of the WorldNet network. For the nine months ended
September 30, 1998, EBITDA improved $127 million, or 30.7%, to negative $287
million compared with the same period last year. The improvement was driven by
revenue growth in AT&T WorldNet and decreased marketing and sales expense in
EasyLink.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
INTERNATIONAL OPERATIONS AND VENTURES
International operations and ventures includes AT&T's consolidated foreign
operations, the Company's transit and reorigination businesses, on-line services
in the Asia/Pacific region, as well as the equity earnings/losses of AT&T's
non-consolidated joint ventures. International operations and ventures does not
include bilateral international long-distance traffic. (The results of
international operations and ventures are included in other and corporate.)
Three months
ended
September 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 218 $ 178 $ 40 22.7%
EBIT................................. (40) (82) 42 51.3%
EBITDA............................... (28) (71) 43 60.5%
OTHER ITEMS
Capital additions....................$ 37 $ 69 $ (32) (46.1)%
Nine months
ended
September 30, Change
$ in millions 1998 1997 $ %
Revenue..............................$ 598 $ 494 $ 104 21.2%
EBIT................................. (161) (343) 182 53.0%
EBITDA............................... (116) (299) 183 61.3%
OTHER ITEMS
Capital additions....................$ 86 $ 377 $(291) (77.3)%
At Sept. 30, At Dec. 31, Change
1998 1997 $ %
Total assets.........................$1,432 $1,837 $(405) (22.0)%
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
REVENUE
For the three months ended September 30, 1998, revenue increased $40 million, or
22.7%, to $218 million compared with the same period in 1997. For the nine
months ended September 30, 1998, revenue increased $104 million, or 21.2%, to
$598 million, compared with the same period last year. These revenue increases
were driven by growth in reorigination and AT&T Communications Services UK,
partially offset by declines in certain non-strategic businesses. Revenue from
continuing strategic international operations grew approximately 53% and 55% for
the three and nine months ended September 30, 1998, respectively, compared with
the same periods in 1997 primarily as a result of growth in AT&T Communications
UK and increased reorigination traffic.
EBIT/EBITDA
For the three months ended September 30, 1998, EBIT improved $42 million, or
51.3%, to negative $40 million compared with the same period in 1997. EBITDA
improved $43 million, or 60.5%, to negative $28 million compared with the same
period in 1997. For the nine months ended September 30, 1998, EBIT improved $182
million, or 53.0%, to negative $161 million compared with the same period in
1997. EBITDA improved $183 million, or 61.3%, to negative $116 million, compared
with the first nine months of 1997. The EBIT and EBITDA improvements continued
in the quarter and year to date as revenues increased and the Company continued
to streamline its international operations and exit non-strategic and
unprofitable businesses. Revenue grew 22.7% in the quarter and 21.2% year to
date despite the exit of these businesses.
Management is currently assessing the impact of the announcement regarding the
joint venture to be formed with British Telecommunications PLC (BT) on
international operations and ventures. As a result of the joint venture
agreement, AT&T will be required to exit certain operations which may be
determined to compete directly with BT. A full review is currently underway to
determine the size and scope of any related international restructuring charges.
Management expects to have definitive plans in place by the end of 1998, and
accordingly, a restructuring charge associated with this review will be
forthcoming in the fourth quarter.
OTHER ITEMS
Capital additions decreased $291 million for the nine months ended September 30,
1998, compared with the same period last year. The decrease was primarily due to
a decrease in investments in non-consolidated subsidiaries.
Total assets were $1,432 million at September 30, 1998, compared with $1,837
million at December 31, 1997. The decrease is due primarily to a decrease in
cash resulting from a loan to an affiliated entity and due to a reduction in
receivables due primarily to the settlement of the receivable relating to the
sale of SSI.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
SEPTEMBER 30, 1998 VERSUS DECEMBER 31, 1997
September 30, December 31, Change
$ in millions 1998 1997 $ %
Total assets.........................$58,161 $61,095 $(2,934) (4.8)%
Total assets-continuing operations...$58,161 $59,994 $(1,833) (3.1)%
Total assets decreased $2,934 million, or 4.8%, primarily due to divestments of
non-strategic assets partially offset by investments in strategic businesses.
Declines in other and long-term receivables, net assets from discontinued
operations, and investments were partially offset by increases in cash,
property, plant and equipment and other assets. The decrease in other and
long-term receivables is due primarily to the repayment of loans by UCS as part
of the settlement for our April 2, 1998, sale to Citicorp while the decrease in
net assets from discontinued operations also reflects the sale of UCS. The
decline in investments is primarily due to the sales of LIN-TV and SmarTone. The
increase in cash is mainly due to the cash received from Citibank in the second
quarter of 1998 related to the sale of UCS partially offset by cash used to
repurchase common stock and to extinguish $1,046 million in debt. The increase
in property, plant and equipment primarily reflects the investment in the
expansion of the long-distance, local communications and wireless networks
partially offset by the local asset impairment charge and the sale of AT&T
Solutions Customer Care. The increase in other assets is primarily due to
goodwill associated with our purchase of ACC.
Total liabilities decreased $3,323 million, or 8.9%, primarily due to declines
in debt, payroll and benefit-related liabilities, deferred income taxes, and
accounts payable. These decreases were partially offset by increases in other
current liabilities and long-term benefit-related liabilities. The decreases in
both short-term and long-term debt reflect the paydown of debt with the proceeds
from the sales of UCS, LIN-TV and AT&T Solutions Customer Care as well as the
early extinguishment of debt, mentioned above. The decline in payroll and
benefit- related liabilities primarily reflects the payout of the year-end
payroll accrual and employee bonuses, and the reversal of a portion of the 1995
business restructuring reserve. The decrease in deferred income taxes primarily
reflects the impact of the restructuring and other charges while the decline in
accounts payable is primarily due to a decrease in payables associated with our
high year-end capital expenditures. The increase in other current liabilities is
mainly due to an increase in accrued income taxes primarily associated with the
sale of UCS. The increase in long-term benefit-related liabilities is primarily
due to the second quarter charges associated with the VRIP which resulted in the
establishment of a liability for the Management Pension Plan.
Total shareowners' equity increased $389 million, or 1.6%, to $24,067 million,
primarily due to current year's net income partially offset by the AT&T share
re-purchase program, as discussed in the cash flows narrative, and dividends
declared.
The ratio of total debt to total capital at September 30, 1998, was 22.8%
compared with 33.5% at December 31, 1997. The decrease was primarily the result
of lower debt. The ratio of total debt, net of cash, to total capital was 10.7%
at September 30, 1998.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In the normal course of business AT&T uses certain derivative financial
instruments, mainly interest rate swaps and foreign currency exchange rate
contracts. The interest rate swaps and foreign currency contracts and options
allow the Company to manage its exposures to changing interest rates and
currency exchange rates. AT&T does not use derivative financial instruments for
speculative purposes. Credit policies are designed to limit the risks of dealing
with other parties to these instruments. In management's view, the risks to AT&T
from using these derivative financial instruments are small and the benefits
include more stable earnings in periods when interest rates and currency
exchange rates are changing.
The Company has revolving credit facilities of $1.0 billion at September 30,
1998. The credit facilities are intended for general corporate purposes, which
include support for AT&T's commercial paper, and were unused at September 30,
1998.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
LIQUIDITY
Nine months
ended
September 30,
$ in millions 1998 1997
CASH FLOW:
Provided by operating activities $6,841 $5,697
Provided by(used in) investing activities 6,965 (3,437)
Used in financing activities (10,026) (2,076)
EBITDA* ................................... $8,744 $8,193
* Earnings before interest, taxes, depreciation and amortization (EBITDA)
for the first nine months of 1998 included $2,827 million of restructuring
and other charges, pre-tax gains on the sales of LIN Television Corporation
(LIN-TV) of $317 million, AT&T Solutions Customer Care of $350 million and
AT&T's investment in SmarTone Telecommunications Holdings Limited
(SmarTone) of $103 million.
EBITDA for the nine months ended September 30, 1997, contained an $80
million charge for exiting the two-way messaging business and a $100
million benefit from the reversal of pre-1995 restructuring charges. In
addition, EBITDA also included a $97 million pre-tax gain on the sale of
AT&T Skynet Satellite Services (Skynet).
Cash flows provided by operating activities of continuing operations for the
nine months ended September 30, 1998, were $6,841 million. This represents an
increase of $1,144 million compared with the first nine months of 1997. The
increase in operating cash flow was driven primarily by the approximately $1,400
million increase in income from continuing operations excluding the
restructuring and other charges and the gains on sales which have essentially no
impact on operating cash flows.
For the nine months ended September 30, 1998, cash provided by investing
activities of $6,965 million increased $10,402 million from a $3,437 million use
of cash for the nine months ended September 30, 1997, due primarily to the UCS
sale on April 2, 1998, for which we received $5,722 million in settlement of
receivables as well as $3,500 million in proceeds from the sale. Additionally,
in 1998 we received $742 million, $625 million and $183 million from the sales
of LIN-TV, AT&T Solutions Customer Care and SmarTone, respectively.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Net cash used in financing activities of $10,026 million increased $7,950
million from $2,076 million for the first nine months of 1997. This primarily
reflects the use of cash received from 1998 asset dispositions to paydown
commercial paper and the repurchase of approximately $3 billion of AT&T common
stock in connection with the Company's share repurchase program described below.
In addition, we used cash to retire $1,046 million of long-term debt obligations
associated with the TCG pooling as well as repay approximately $900 million of
scheduled debt maturities. The Company paid a premium of approximately $200
million associated with the early extinguishment resulting in an after tax
charge of $137 million which was recorded as an extraordinary loss.
In July 1998, AT&T's Board of Directors authorized an open market share
repurchase program to repurchase up to $3 billion of AT&T common stock. Between
July 23 and September 30, 1998, AT&T repurchased approximately 53 million
shares. As announced previously, AT&T expects to reissue the repurchased shares
as part of the shares to be issued in connection with the TCI merger.
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. EBITDA increased $551 million, or 6.7%, for the first nine months of
1998 compared to the same period in 1997. Excluding the restructuring and other
charges and gains in 1998 and the 1997 reversal and charge, EBITDA increased
33.7% to $10,801 million for the first nine months of 1998 from $8,076 million
for the first nine months of 1997. The increase was due primarily to the net
impact of higher revenues, cost reduction efforts and lower access and
interconnection expenses.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RECENT PRONOUNCEMENTS
Beginning with the 1998 annual report we will adopt Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes the standards for
the manner in which public enterprises are required to report financial and
descriptive information about their operating segments. The standard defines
operating segments as components of an enterprise for which separate financial
information is available and evaluated regularly as a means for assessing
segment performance and allocating resources to segments. A measure of profit or
loss, total assets and other related information are required to be disclosed
for each operating segment. In addition, this standard requires the annual
disclosure of: information concerning revenues derived from the enterprise's
products or services; countries in which it earns revenues or holds assets, and
major customers.
In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 132, "Employers' Disclosure about Pensions and Other Postretirement
Benefits." Among other provisions, it standardizes certain disclosure
requirements for pension and other postretirement benefits, requires additional
information on changes in the benefit obligations and fair values of plan
assets, and eliminates certain other disclosures. The standard is effective for
fiscal years beginning after December 15, 1997. For AT&T this means that the
standard is effective for the 1998 annual report. Since the standard applies
only to the presentation of pension and other postretirement benefit
information, it will not have any impact on AT&T's results of operations,
financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. " Among other provisions, the SOP
requires that entities capitalize certain internal-use software costs once
certain criteria are met. The SOP is effective for financial statements for
fiscal years beginning after December 15, 1998, though early adoption is
encouraged. For AT&T this means that it must be adopted no later than January 1,
1999. If AT&T elects to adopt the SOP earlier than the effective date,
restatement of interim periods during the year of adoption is required.
Management is currently assessing the impact on AT&T's consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities. " Among other provisions, it requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Gains and losses resulting from changes in the fair values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. This standard is effective for fiscal years
beginning after June 15, 1999, though earlier adoption is encouraged and
retroactive application is prohibited. For AT&T this means that the standard
must be adopted no later than January 1, 2000. Management does not expect the
adoption of this standard to have a material impact on AT&T's results of
operations, financial position or cash flows.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OTHER DEVELOPMENTS
On July 23, 1998, AT&T completed the merger with TCG, pursuant to an agreement
and plan of merger dated January 8, 1998. Each share of TCG common stock was
exchanged for 0.943 of AT&T common stock resulting in the issuance of
approximately 181.6 million shares in the transaction. The merger was accounted
for as a pooling of interests, and accordingly, AT&T's results of operations,
financial position and cash flows have been restated to reflect the merger. In
the third quarter of 1998, we recognized $85 of merger related expenses.
On March 3, 1998, AT&T agreed to sell WOOD-TV, its television station in Grand
Rapids, Michigan, for approximately $123 million, subject to certain
adjustments, which is expected to close in the fourth quarter of 1998.
On June 24, 1998, AT&T signed a definitive merger agreement with TCI for an
all-stock transaction. Under the agreement, AT&T will issue 0.7757 shares of
AT&T common stock for each share of TCI Group Series A common stock and 0.8533
shares of AT&T common stock for each share of TCI Group Series B stock. The
transaction, which is subject to regulatory, shareowner and other approvals, is
expected to be completed in the first half of 1999. Also announced was TCI's
intention to combine Liberty Media Group, its programming arm, and TCI Ventures
Group, its technology investments unit, to form the new Liberty Media Group.
Upon closing of the AT&T/TCI merger, the shareowners of the new Liberty Media
Group will be issued separate tracking stock by AT&T in exchange for the shares
currently held in Liberty Media Group and TCI Ventures Group.
AT&T and BT announced on July 26, 1998 that they will create a global venture to
serve the communications needs of multinational companies and the international
calling needs of individuals and businesses around the world. The venture, which
will be owned equally by AT&T and BT, will combine trans-border assets and
operations of each company, including their existing international networks, all
of their international traffic, all of their trans-border products for business
customers - including an expanding set of Concert services - and AT&T and BT's
multinational accounts in selected industry sectors. The formation of the
venture is subject to certain conditions, including receipt of regulatory
approvals. The transaction is expected to be completed by mid 1999. As a result
of the joint venture agreement, AT&T will be required to exit certain operations
which may be determined to compete directly with BT. A full review is currently
underway to determine the size and scope of any related international
restructuring charges. Management expects to have definitive plans in place by
the end of 1998, and accordingly, a restructuring charge associated with this
review will be forthcoming in the fourth quarter.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
YEAR 2000
AT&T is preparing its systems and applications for the year 2000 (Y2K). The
problem the Y2K program addresses is the use of two-digit instead of four-digit
year fields in computer systems. If the computer systems cannot distinguish
between the year 1900 and the year 2000, system failures or other computer
errors could result. The potential for failures and errors spans all aspects of
our business, including computer systems, voice and data networks, and building
infrastructures. We are also faced with addressing our interdependencies with
our suppliers and connecting carriers and our major customers, which all face
the same problem.
The AT&T Y2K Program is enterprise-wide and is focused on four inter-related
categories which are critical to maintaining uninterrupted service to our
customers: AT&T networks, AT&T-developed applications, and their external
interfaces and the information technology (IT) platforms that support the
applications. Additionally, the Company has a Y2K program in place for its
non-IT infrastructure, which is essential to conduct our business, but is less
critical to serving the needs of AT&T's customers. The key milestones common to
each category are: assessment, repair/remediation, testing and certification.
AT&T monitors and tracks the progress of the Y2K program through a series of
scorecards which capture the activities related to the Y2K process phases. AT&T
has a target of December 31, 1998 for the completion of assessment, revision and
testing of all customer-affecting systems that were part of AT&T's inventory as
of January 1, 1998. The Y2K plans for AT&T Local Services (including TCG) are
being integrated into the overall AT&T plan and have targeted completion of
assessment by year-end 1998, with revision and testing scheduled for completion
by the end of the first quarter of 1999. AT&T is also evaluating TCI's Y2K
program to understand the potential impact on the existing AT&T program. All
numbers cited in this Form 10-Q/A, Part I exclude information regarding those
recent and pending acquisitions, whose programs are still being evaluated and
planned for integration into the overall AT&T year 2000 program planning.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Program Status
AT&T has approximately 3,000 internally developed applications that (1) directly
support AT&T's voice and data telecommunications services (including wired and
wireless); (2) are critical to the provisioning, administration, maintenance and
customer service/support related to our telecommunications services; and (3)
support our sales and marketing organizations, other AT&T services and internal
administrative functions. These applications represent 350 million lines of code
that must be assessed, repaired and tested. As of September 30, 1998, AT&T has
completed 99% of the assessment, approximately 91% of the repair, and about 67%
of the application testing. The Company expects to have completed the assessment
phase for the Company as a whole in 1998 and to be about 97% and 90% complete in
the repair and certification phases, respectively, in 1998, and 100% complete in
1999.
The AT&T network is critical to providing top quality, reliable service to AT&T
customers. AT&T's goal is to maintain this quality, and provide uninterrupted
service at the turn of the century. In addition to the AT&T-developed
applications supporting the network, AT&T has inventoried over 800 externally
purchased network elements (NE) including switches, routers, network control
points and signal transfer points. All of the NEs have been assessed: 80% are
non-impacted, and plans are in place regarding Y2K-certification of the
remaining 20% by the end of 1998. Additional Y2K testing is conducted to
independently verify supplier claims of compliance. After operating system (OS)/
NE component testing and certification is complete, AT&T will perform
integration testing to verify Y2K-certification of NEs in conjunction with
associated OS/applications. At September 30, 1998, the assessment of the OS
applications was 100% complete, and 99% and 96% complete for the repair and
certification phases, respectively. At September 30, 1998, NE certification was
approximately 64% complete. AT&T expects to complete all phases of OS/NE
certification by year-end 1998, with full deployment by midyear 1999. AT&T plans
to conduct interoperability testing with other carriers during 1999 after the
involved networks have achieved Y2K-compliance.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
With respect to external (third party) interface assessment, formal letters have
been sent to about 2,000 domestic telecommunications companies and international
telecommunications authorities to request information on their Y2K plans and
targets for compliance. The Company has identified about 1,000 different types
of third party interfaces and about 10,000 total instances of those types, and
are in the process of assessing the Y2K impacts. At September 30, 1998, AT&T
assessed approximately 52% of third party interface types and approximately 48%
were Y2K compliant. The Company expects to complete Y2K certification for
approximately 75% of external interface types by year-end 1998, with 100%
expected to be complete by mid-year 1999.
The IT infrastructure category addresses not only the computing platforms that
are critical to the AT&T-developed applications, but also the common modules,
communications protocols, the internal AT&T wide-area and local-area networks,
desktop hardware/software and the internal voice network. The largest part of
this effort has been focused on the inventory and assessment of the products and
components, with much of the deployment scheduled for the latter part of the
year. As of September 30, 1998, AT&T was approximately 44% compliant in
computing platforms, 4% compliant in desktops, 70% compliant in voice systems
and adjuncts, and 46% compliant in data networks. AT&T expects substantial
completion of IT infrastructure certification by the end of 1998, with 100%
completion during 1999.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The non-IT infrastructure focuses on the energy and environment management
systems that are critical to various computer systems, as well as the
fundamental need to assure continuing safety, security and operations. The Y2K
program encompasses over 8,000 sites, as well as about 11,000 cell sites. The
majority of the effort to date for Y2K compliance within the non-IT
infrastructure is in inventory and assessment. At September 30, 1998,
approximately 54% of all sites completed inventory, 27% completed assessment and
26% are Y2K compliant (or non-impacted). AT&T expects to complete 60% of its
sites by year-end 1998, with 100% to be Y2K-compliant by year-end 1999.
Costs
We have expended approximately $300 million since inception in 1997 on all
phases of the Y2K project. Total costs for the nine months ended September 30,
1998, were approximately $189 million, which included approximately $10 million
of capital spending for upgrading and replacing non-compliant computer systems.
The Company anticipates the total cost of the project to be approximately $375
million for the full year 1998, which includes approximately $75 million of
capitalized fixed assets. 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 of the Y2K project.
We anticipate total costs for 1999 to be approximately $225 million, which
includes approximately $15 million of capitalized fixed assets.
Risk Assessment
We have assessed our business exposure that would result from a failure of our
Y2K Program, as well as those of our suppliers, connecting carriers and major
customers. Such failures would result in business consequences that could
include failure to be able to serve customers, loss of network functionality,
inability to render accurate bills, lost revenue, harm to the AT&T brand, legal
and regulatory exposure, and failure of management controls. Although the
Company believes that internal Y2K compliance will be achieved by December 31,
1999, there can be no assurance that the Y2K problem will not have a material
adverse affect on the Company's business, financial condition and results of
operations.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Contingency Plans
AT&T is in the process of establishing Y2K contingency plans. AT&T's contingency
plan initiatives include the following:
Business resumption teams to be on call during the millennium change to
monitor the network, critical systems, operations centers and business
processes and - positioned to react immediately to facilitate repairs,
alternate process activation and/or re-prioritization of work processes and
associated resources.
Alternate processes to be developed to support critical customer functions in
the event information systems or mechanized processes experience Y2K
disruptions.
Time zone "quiet period" to de-activate non-mission-critical systems and
processes during the 24-hour transition period when regional time zones pass
through the millennium change; these systems/processes would be re-activated
once they are all switched over to 2000.
Network capacity expansion to be engineered to accommodate demand peaks.
Replacement/repair parallel paths to be established that provide for repair
and readiness of existing systems and components that are scheduled for
replacement by the year 2000, in the event the replacement schedules are not
met.
Alternate suppliers and implementation plans to be in place for third-party
products/services that fail to meet Y2K compliance commitment schedules.
Data retention and recovery procedures to be in place for customer and
critical business data to provide pre-millennium backups with on-site
(primary) as well as off-site (secondary) data copies.
<PAGE>
AT&T Form 10-Q/A - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FORWARD LOOKING STATEMENTS
Except for the historical statements and discussions contained herein,
statements contained in this Report on Form 10-Q/A constitute "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Any Form 10-K, Annual Report
to Shareowners, Form 10-Q or Form 8-K of AT&T may include forward looking
statements, including statements concerning future operating performance, Y2K
compliance, AT&T's share of new and existing markets, AT&T's short- and
long-term revenue and earnings growth rates, and general industry growth rates
and AT&T's performance relative thereto. These forward looking statements rely
on a number of assumptions concerning future events, including the adoption and
implementation of balanced and effective rules and regulations by the FCC and
the state public regulatory agencies, and AT&T's ability to achieve a
significant market penetration in new markets. These forward looking statements
are subject to a number of uncertainties and other factors, many of which are
outside AT&T's control, that could cause actual results to differ materially
from such statements.
For a more complete discussion of the factors that could cause actual results to
differ materially from such forward looking statements, see the discussion
thereof contained under the heading "Forward Looking Statements" in the
Company's Form 10-K for the year ended December 31, 1997. Readers should also
consider the factors discussed under the headings "Results of Operations" and
"Financial Condition" included in this Form 10-Q/A. AT&T disclaims any intention
or obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
<PAGE>
AT&T Form 10-Q/A - Part II
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions)
(Unaudited)
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number
10 Framework Agreement, dated October 23, 1998,
among AT&T Corp., VLT Corporation, British
Telecommunications plc, BT (Netherlands) Holdings
B.V. and Thistle B.V. (Exhibit 10 to Form 10-Q
for the third quarter 1998, File No. 1-1105).
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter ended
September 30, 1998.
<PAGE>
AT&T Form 10-Q/A
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AT&T Corp.
/s/ M. B. Tart
------------------------------
By: M. B. Tart
Vice President and Controller
(Principal Accounting Officer)
Date: January 6, 1999
<PAGE>
AT&T Form 10-Q/A
Exhibit Index
Exhibit
Number
10 Framework Agreement, dated October 23, 1998,
among AT&T Corp., VLT Corporation, British
Telecommunications plc, BT (Netherlands) Holdings
B.V. and Thistle B.V. (Exhibit 10 to Form 10-Q
for the third quarter 1998, File No. 1-1105).
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
Exhibit 12
Form 10-Q/A
For the Nine
Months Ended
September 30, 1998
AT&T Corp.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
(Unaudited)
Income from Continuing Operations
Before Income Taxes ................................. $4,991
Less Interest Capitalized during
the Period........................................... 151
Add Equity Investment Losses, net of distributions
of Less than 50% Owned Affiliates.................... 173
Add Fixed Charges...................................... 683
Total Earnings from Continuing
Operations Before Income Taxes
and Fixed Charges.................................... $5,696
Fixed Charges
Total Interest Expense Including Capitalized Interest.. $ 473
Interest Portion of Rental Expense..................... 210
Total Fixed Charges.................................. $ 683
Ratio of Earnings to Fixed Charges..................... 8.3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated balance sheet of AT&T Corp. at September 30, 1998 and the
unaudited consolidated statement of income for the nine-month period ended
September 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,190
<SECURITIES> 0
<RECEIVABLES> 10,008
<ALLOWANCES> 1,029
<INVENTORY> 0
<CURRENT-ASSETS> 15,563
<PP&E> 49,811
<DEPRECIATION> 24,718
<TOTAL-ASSETS> 58,161
<CURRENT-LIABILITIES> 14,723
<BONDS> 6,079
0
0
<COMMON> 1,754
<OTHER-SE> 22,313
<TOTAL-LIABILITY-AND-EQUITY> 58,161
<SALES> 0
<TOTAL-REVENUES> 39,695
<CGS> 0
<TOTAL-COSTS> 35,551
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,050
<INTEREST-EXPENSE> 322
<INCOME-PRETAX> 4,991
<INCOME-TAX> 1,840
<INCOME-CONTINUING> 3,151
<DISCONTINUED> 1,300
<EXTRAORDINARY> (137)
<CHANGES> 0
<NET-INCOME> 4,314
<EPS-PRIMARY> 2.40
<EPS-DILUTED> 2.38
</TABLE>
