-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F5iNTYyDTKMphx9R7jB0u/9OIZw5h/9klhoOPy2AbPtvLqM7llsoZ771N/jggTMJ VJuugHffped4Dsv4jtPS7Q== 0000005907-98-000013.txt : 19980330 0000005907-98-000013.hdr.sgml : 19980330 ACCESSION NUMBER: 0000005907-98-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 27 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: BSE SROS: CSX SROS: NYSE SROS: PHLX SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: AT&T CORP CENTRAL INDEX KEY: 0000005907 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 134924710 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-01105 FILM NUMBER: 98575795 BUSINESS ADDRESS: STREET 1: 32 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10013 BUSINESS PHONE: 2123875400 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN TELEPHONE & TELEGRAPH CO DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Fiscal Year Ended December 31, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period From _________ to _________ Commission File Number 1-1105 AT&T CORP. A NEW YORK I.R.S. EMPLOYER CORPORATION NO. 13-4924710 32 Avenue of the Americas, New York, New York 10013-2412 Telephone Number 212-387-5400 Securities registered pursuant to Section 12(b) of the Act: See attached SCHEDULE A. Securities registered pursuant to Section 12(g) of the Act: None. 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........ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) At February 28, 1998, the aggregate market value of the voting stock held by non-affiliates was $98,828,206,879. At February 28, 1998, 1,620,390,922 common shares were outstanding. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the registrant's annual report to shareholders for the year ended December 31, 1997 (Part II) (2) Portions of the registrant's definitive proxy statement dated March 26, 1998, issued in connection with the annual meeting of shareholders (Part III) SCHEDULE A Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered Common Shares # New York, Boston, Chicago, (Par Value $1 Per Share) ## Philadelphia and Pacific Stock # Exchanges Thirty-Seven Year 4-3/4% Debentures, # due June 1, 1998 # # Thirty-Six Year 4-3/8% Debentures, # due May 1, 1999 # # Thirty-Three Year 6% Debentures, # due August 1, 2000 # # Thirty-Five Year 5-1/8% Debentures, # ##New York Stock Exchange due April 1, 2001 # # Ten Year 7-1/8% Notes, # due January 15, 2002 # # Ten Year 6-3/4% Notes, # due April 1, 2004 # # Ten Year 7% Notes, # due May 15, 2005 # # Twelve Year 7-1/2% Notes, # due June 1, 2006 # # Twelve Year 7-3/4% Notes, # due March 1, 2007 # # Thirty Year 8-1/8% Debentures, # due January 15, 2022 # # Medium Term Note 8.2%, # due February 15, 2005 # # Thirty Year 8.35% Debentures, # due January 15, 2025 # # Thirty-Two Year 8-1/8% Debentures, # due July 15, 2024 # # Forty Year 8-5/8% Debentures, # due December 1, 2031 # TABLE OF CONTENTS PART I Item Description Page 1. Business ........................................................ 1 2. Properties ...................................................... 9 3. Legal Proceedings ............................................... 10 4. Submission of Matters to a Vote of Security-Holders ............. 11 PART II Description 5. Market for Registrant's Common Equity and Related Stockholder Matters ....................................................... 13 6. Selected Financial Data ......................................... 13 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................................... 13 8. Financial Statements and Supplementary Data ..................... 13 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...................................... 13 PART III Description 10. Directors and Executive Officers of the Registrant .............. 13 11. Executive Compensation .......................................... 13 12. Security Ownership of Certain Beneficial Owners and Management .. 13 13. Certain Relationships and Related Transactions .................. 13 PART IV Description 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K....................................................... 14 See page 12 for "Executive Officers of the Registrant." PART I ITEM 1. BUSINESS. GENERAL AT&T Corp. ("AT&T" or the "Company") was incorporated in 1885 under the laws of the State of New York and has its principal executive offices at 32 Avenue of the Americas, New York, New York 10013-2412 (telephone number 212-387-5400).Internet users can access information about AT&T and its services at http://www.att.com. AT&T is among the world's communications leaders, providing voice, data and video telecommunications services to large and small businesses, consumers and government entities. AT&T and its subsidiaries furnish regional, domestic, international and local communication services. AT&T's wholly owned subsidiaries, including AT&T Wireless Services, Inc., provide cellular telephone and other wireless services. AT&T also provides billing, directory, and calling card services to support its communications business. DEVELOPMENT OF BUSINESS During 1996 AT&T separated its business into three publicly held stand-alone companies: the current AT&T, focused on communication and information services, Lucent Technologies Inc. ("Lucent") focused on communications systems and technology and NCR Corporation ("NCR") focused on transaction-intensive computing. AT&T distributed to its shareowners all of the shares AT&T owned of Lucent on September 30, 1996 and all of the shares of NCR on December 31, 1996. Following the separation, AT&T has focused on its core business and disposed of assets and businesses that were not strategic. In October 1996, AT&T completed the sale of its majority interest in AT&T Capital Corporation (leasing services business) in which AT&T received $1.8 billion in cash. In 1997, AT&T completed the sales of AT&T Skynet (satellite services), AT&T Tridom (satellite data and video communications services) and its submarine systems business. In addition, AT&T sold its investments in DirectTV (direct-broadcast television service and DSS equipment business) and decreased its investment in Smartone Communications (a wireless joint venture in Hong Kong). In addition, in 1997, AT&T agreed to sell AT&T Universal Card Services, Inc.(credit card services business), American Transtech Inc. (customer care services), its investment in LIN Television Corporation (commercial television broadcasting) and WOOD-TV (AT&T's television station in Grand Rapids, Michigan). On January 8, 1998, AT&T entered into a definitive merger agreement with Teleport Communications Group, Inc. ("TCG"). The merger with TCG, which remains subject to regulatory approvals and a number of other conditions, is expected to close mid to late 1998. Under the merger agreement, each share of TCG will be exchanged for .943 of an AT&T share in an all-stock transaction valued at the time at approximately $11.3 billion. TCG is the largest competitive local exchange carrier in the United States, with networks in operation or under construction in 66 U.S. markets as of December 31, 1997. As of September 30, 1997, TCG's local networks encompassed over 8,680 route miles, over 460,285 fiber miles, and 33 local digital voice switches. These local networks are aimed at addressing high-volume business customers. AT&T believes that the TCG merger will accelerate its ability to offer local services to business customers and, ultimately, to other customers. LONG DISTANCE SERVICES AT&T's communication and information services business addresses the needs of consumers, large and small businesses, the Federal government and state and local governments for voice, data and video telecommunications services. Business units within this group provide regular and custom long distance communications services, data transmission services, 500 services, toll-free or 800 and 888 services, 900 services, private line services, software defined network services ("SDN"), integrated services digital network ("ISDN") technology based services, and electronic mail, electronic data interchanges and enhanced facsimile services. AT&T also provides special long distance services, including AT&T Calling Card services, special calling plans and the Company's domestic and international operator services. AT&T provides communications services internationally, including transaction services, global networks, network management and value added network services (i.e., services offered over communications transmission facilities that employ computer processing applications). AT&T provides interstate and intrastate long distance telecommunications services throughout the continental United States and provides, or joins in providing with other carriers, telecommunications services to and from Alaska, Hawaii, Puerto Rico and the Virgin Islands and international telecommunications services to and from virtually all nations and territories around the world. In the continental United States, AT&T provides long distance telecommunications services over its own network. Virtually all switched services are computer controlled and digitally switched and interconnected by a packet switched signaling network. Transmission facilities consist of approximately 2 billion circuit-miles using lightwave, satellite, wire and coaxial cable and microwave radio technology. International telecommunications services are provided via multiple international transoceanic submarine cable (primarily lightwave) systems and via international satellite and radio facilities. WIRELESS SERVICES AT&T is one of the world's largest wireless service providers. In the United States, AT&T holds licenses to operate systems providing 850 Mhz broadband wireless services covering markets with a population of over 92 million nationwide and messaging and air-to-ground services throughout the country. The services provided by AT&T currently include cellular, voice and data, messaging and air-to-ground communications. As of December 1997, AT&T served over 6 million cellular subscribers. In addition, AT&T has purchased (primarily in auctions conducted by the Federal Communications Commission ("FCC")) 1900 Mhz wireless broadband licenses covering markets with a population of over 112 million. AT&T is required by the FCC to provide adequate broadband PCS service to at least one-third of the population in its licensed areas within five years of being licensed and two-thirds of the population in its licensed areas within ten years of being licensed. The licenses are granted for ten year terms from the original date of issuance and may be renewed by AT&T by meeting the FCC's renewal criteria and upon compliance with the FCC's renewal procedures. AT&T has created service clusters in major metropolitan areas and linked its and other service providers systems into a network which permits its wireless cellular subscribers to both place and receive calls anywhere they travel in areas served by the network, even if the local wireless telephone service is not provided by AT&T. AT&T is now integrating other communications technologies into the network. AT&T will continue to explore the use of emerging technologies to expand the reach of the network and to provide additional services (especially data and internet services). AT&T also offers one-way messaging systems such as paging services. As of December 31, 1997, the Company had over 1.3 million messaging service subscribers. The majority of these subscribers are in locations where AT&T holds cellular licenses. AT&T's wireless services are conducted primarily through subsidiaries of AT&T Wireless Services, Inc. (formerly McCaw Cellular Communications, Inc., which was merged with a special-purpose subsidiary of AT&T in September 1994). LOCAL SERVICES Following passage of the Telecommunications Act of 1996 (the "Telecommunications Act"), AT&T applied for permission to provide local service in all 50 states. As of December 31, 1997, AT&T had received authority to provide service in 48 states and the District of Columbia. As of December 31, 1997, AT&T offered AT&T Digital Link service for business customers on an outbound only basis in 48 states and on an inbound and outbound basis in one state. Also as of such date, AT&T offered resold local service to consumers in Alaska, California, Connecticut, Georgia, Illinois, Michigan, Texas and Rochester, New York as well as offering resold local service to small business customers in California and Connecticut. Notwithstanding these efforts, AT&T has experienced significant difficulty in penetrating local markets. AT&T's ability to purchase combined network elements from incumbent local exchange carriers (ILECS), one of the primary methods by which AT&T intends to provide local service to residential and small business customers, was severely limited by, among other factors, regulatory and judicial actions and a lack of technical and operational interfaces necessary to order network elements from ILECs. In spite of strong demand, in the fourth quarter of 1997 AT&T stopped actively marketing resold local service to residential and small business customers in most of the areas in which it offered such service because of limitations on ILECs' ability to handle anticipated demand and because discounts AT&T receives from ILECs on the sale of such service are insufficient to make resale a viable long-term method of offering service. AT&T's ability to provide facilities-based local service to business customers through AT&T Digital Link service was also hampered by the inability to provide local number portability and other factors. AT&T will continue to pursue the development of alternative methods of local entry, which remains a key growth opportunity. See "Competition" and "Forward Looking Statements" for a discussion of the potential impact on AT&T of an inability to profitably provide local service. AT&T SOLUTIONS AT&T Solutions, Inc., established in 1995, provides outsourcing, consulting, networking integration and multimedia call center services. AT&T Solutions provides clients with customized information technology solutions to operate and manage voice, data and video services, including local and wide area networks, PBXs, voice-processing systems and voice and data terminals. ONLINE SERVICES AT&T also provides a variety of online and internet access services. These include AT&T WorldNet(R) Service, a service providing dedicated and dial-up access to the internet, AT&T Easy World Wide Web(R) Service, an internet web site creation and hosting service, custom web site hosting services, and AT&T SecureBuy SM Service, an Internet transaction service that simplifies buying and selling on the Internet. INTERNATIONAL AT&T has established a number of international alliances to increase the reach and scope of AT&T's services and network over time and has invested in certain countries in order to increase the range of services AT&T offers in those countries. For example, AT&T founded the WorldPartners alliance in 1993 to provide multinational customers with seamless telecommunications and related services. As of the end of 1997, WorldPartners included 17 members who provide services to multinational customers in North America, Latin America, Europe, the Middle East and Asia. In addition, in 1996 AT&T began offering business and consumer services in the United Kingdom and in early 1997 AT&T's joint venture in Mexico, Alestra, began offering long distance service. AT&T also has an interest in several wireless communications companies outside of the United States, including cellular operators licensed to serve Hong Kong, Columbia, Taiwan and parts of India. LEGISLATIVE AND REGULATORY DEVELOPMENTS Telecommunications Act of 1996 In February 1996, the Telecommunications Act became law. The Telecommunications Act, among other things, was designed to foster local exchange competition by establishing a regulatory framework to govern new competitive entry in local and long distance telecommunications services. The Telecommunications Act will permit the Regional Bell Operating Companies ("RBOCs") to provide interexchange services originating in any state in its region after demonstrating to the FCC that such provision is in the public interest and satisfying the conditions for developing local competition established by the Telecommunications Act. In August 1996, the FCC adopted rules and regulations, including pricing rules (the "Pricing Rules") to implement the local competition provisions of the Telecommunications Act, including with respect to the terms and conditions of interconnection with local exchange carrier ("LEC") networks and the standards governing the purchase of unbundled network elements and wholesale services from LECs. These implementing rules rely on state public utilities commissions to develop the specific rates and procedures applicable to particular states within the framework prescribed by the FCC. On July 18, 1997, the United States Court of Appeals for the 8th Circuit issued a decision holding that the FCC lacks authority to establish pricing rules to implement the sections of the local competition provisions of the Telecommunications Act applicable to interconnection with LEC networks and the purchase of unbundled network elements and wholesale services from LECs. Accordingly, the Court vacated the rules that the FCC had adopted in August 1996, and which had been stayed by the Court since September 1996. Absent effectiveness of the Pricing Rules, each state will determine the applicable rates and procedures independent of the framework established by the FCC. However, since the stay was issued, many states have used the Pricing Rules as guidelines in establishing permanent rates, or interim rates that will apply pending the determination of permanent rates in subsequent state proceedings. Nevertheless, there can be no assurance that the prices and other conditions established in each state will provide for effective local service entry and competition or provide AT&T with new market opportunities. On October 14, 1997, the 8th Circuit Court of Appeals vacated an FCC Rule that had prohibited incumbent LECs from separating network elements that are combined in the LEC's network, except at the request of the competitor purchasing the elements. This decision could increase the difficulty and costs of providing competitive local service through the use of unbundled network elements purchased from the incumbent LECs. On January 26, 1998, the United States Supreme Court agreed to review the aforementioned decisions of the Eighth Circuit Court of Appeals. Under the normal procedures of the Court, arguments are expected to be heard in October 1998, and a decision is expected sometime in the first half of 1999. On December 31, 1997, the U.S. District Court for the Northern District of Texas issued a memorandum opinion and order holding that the Telecommunications Act's restrictions on the provision of in-region, interLATA service by the RBOCSs are unconstitutional. AT&T and other carriers (collectively, "intervenors") and the FCC filed prompt appeals with the United States Court of Appeals for the Fifth Circuit. On February 11, 1998, the District Court stayed the effectiveness of its December 31 memorandum opinion and order pending appeal. The United States Court of Appeals for the Fifth Circuit will review the aforementioned decision of the U.S. District Court for the Northern District of Texas under an expedited briefing schedule, whereby oral arguments will be heard in July 1998. If the memorandum opinion and order is permitted to take effect, the Telecommunications Act's restrictions on the provision of in-region interLATA services will no longer apply to the plaintiffs in the case, SBC Communications, Inc., U S West, Inc. and Bell Atlantic Corporation. Modification of Final Judgment of 1982 Prior to 1996, AT&T and the RBOCs were subject to the provisions of the Modification of Final Judgment of 1982 (the "MFJ") since its implementation. The Telecommunications Act effectively superseded future operation of the MFJ.Consequently, on April 11, 1996, Judge Harold Greene issued an order terminating the MFJ. Regulation of Rates AT&T is subject to the jurisdiction of the FCC with respect to interstate and international rates, lines and services, and other matters. From July 1989 to October 1995, the FCC regulated AT&T under a system known as "price caps" whereby AT&T's prices, rather than its earnings, were limited. On October 12, 1995, recognizing a decade of enormous change in the long distance market and finding that AT&T lacked market power in the interstate long distance market, the FCC reclassified AT&T as a "non-dominant" carrier for its domestic interstate services. As a result, AT&T became subject to the same regulations as its long distance competitors for such services. Thus, AT&T was no longer subject to price cap regulation for these services, was able to file tariffs that are presumed lawful on one day's notice, and was free of other regulations and reporting requirements that apply only to dominant carriers. In addition, on October 31, 1996, the FCC issued an order that would have prohibited non-dominant carriers, including AT&T, from filing tariffs for their domestic interstate services. AT&T and other parties have filed an appeal of the FCC's order with the United States Court of Appeals for the D.C. Circuit. In February 1997, the D.C. Circuit stayed the effectiveness of the FCC's order pending appeal. Oral argument has not yet been scheduled. If the Court affirms the FCC's order and lifts the stay, non-dominant carriers, including AT&T, will have to utilize mechanisms other than tariffs to establish the terms and conditions that apply to domestic, interstate telecommunications services. Furthermore, in May 1997, the FCC adopted three orders relating to Price Caps, Access Reform, and Universal Service that will result in substantial revisions to the level and structure of access charges that AT&T as a long distance carrier pays to incumbent LECs. AT&T has agreed to pass through to consumers any savings to AT&T as a result of access charge reform. AT&T began implementing these reductions July 15, 1997. Consequently, AT&T's results after June 1997 reflects lower revenue per minute of usage and lower access and other interconnection costs per minute of usage. The Price Cap Order requires LECs to reduce their price cap indices by 6.5 percent annually, less an adjustment for inflation, which is likely to result in a reduction in the interstate access charges that long distance carriers, such as AT&T, pay to LECs. The Access Charge Reform Order restructured access charges so that certain costs that do not vary with usage will be recovered on a flat-rate basis and permitted increased flat-rate assessments on multiline business customers and on residential lines beyond the primary telephone line. This restructuring allows a reduction in access charges assessed on long distance carriers on a usage basis. Finally, the Universal Service Order (which represents an FCC mandated contribution to support schools and libraries and rural health care programs, high cost support and low income support mechanisms which are paid to the Universal Service Administrative Company) adopts a new mechanism for funding universal service which expands the set of carriers that must contribute to support universal service from only long-distance carriers to all carriers, including LECs, that provide interstate telecommunications services. Similarly, the set of carriers eligible for the universal service support has been expanded from only LECs to any eligible carrier providing local service to a customer, including AT&T as a new entrant in local markets. The Universal Service Order also adopted measures to provide discounts on telecommunications services, Internet access and inside wire to eligible schools and libraries and rural health carrier providers. AT&T remains subject to the statutory requirements of Title II of the Communications Act. AT&T must offer service under rates, terms and conditions that are just, reasonable and not unreasonably discriminatory; it is subject to the FCC's complaint process, and it must give notice to the FCC and affected customers prior to discontinuance, reduction, or impairment of service. AT&T has also made certain commitments that address concerns that had been raised with regard to the potential impact of declaring AT&T to be non-dominant, including a three-year rate assurance for low income and low usage residential users and a three-year limit on, and 5 days advance notice for, rate increases on 800 directory assistance and analog private line services. AT&T's international private line services have been classified as non-dominant for several years. AT&T's switched international services have become subject to increased competition, similar to its domestic services and on May 9, 1996, the FCC adopted an order reclassifying AT&T as a non-dominant carrier for such services. AT&T has made certain voluntary commitments that address issues raised in that proceeding, including commitments: (i) to maintain its annual average revenue per minute for international residential calls at or below the 1995 level through May 9, 1999, and in the event of a significant change that substantially raises AT&T's costs, to provide the FCC five business days notice prior to implementing rate increases that would raise the annual average revenue per minute for such calls above the 1995 level; and (ii) to maintain certain discount calling plans providing at least a 15% discount off basic pricing schedules until May 9, 1999. AT&T also made voluntary commitments relating to its operation of international cable facilities, its negotiation of settlement agreements with foreign carriers and its relationship with foreign partners. In addition to the matters described above with respect to the Telecommunications Act, state public service commissions or similar authorities having regulatory power over intrastate rates, lines and services and other matters regulate AT&T's local and intrastate communications services. The system of regulation used in many states is rate-of-return regulation. In recent years, many states have adopted different systems of regulation, such as: complete removal of rate-of-return regulation, pricing flexibility rules, price caps and incentive regulation. COMPETITION AT&T currently faces significant competition in the communication and information services industry and expects that the level of competition will continue to increase. As competitive, regulatory and technological changes occur, including those occasioned by the Telecommunications Act, AT&T anticipates that new and different competitors will enter and expand their position in the communications services markets. These may include entrants from other segments of the communication and information services industry or global competitors seeking to expand their market opportunities. Many such new competitors are likely to enter with a strong market presence, well recognized names and pre-existing direct customer relationships. The Telecommunications Act has already impacted the competitive environment. Anticipating changes in the industry, non-RBOC LECs, which are not required to implement the Telecommunications Act's competitive checklist prior to offering long distance in their home markets, have begun integrating their local service offerings with long distance offerings in advance of AT&T being able to offer combined local and long distance service in these areas, adversely affecting AT&T's revenues and earnings in these service regions. In addition, the Telecommunications Act will permit RBOCs to provide interLATA interexchange services after demonstrating to the FCC that such provision is in the public interest and satisfying the conditions for developing local competition established by the Telecommunications Act. Three RBOCs have petitioned the FCC for permission to provide interLATA interexchange services in one or more states within their home market; to date the FCC has not granted any petition. To the extent that the RBOCs obtain in-region interLATA authority before the Telecommunications Act's checklist of conditions have been fully or satisfactorily implemented and adequate facilities-based local exchange competition exists, there is a substantial risk that AT&T and other interexchange service providers would be at a disadvantage to the RBOCs in providing both local service and combined service packages. Because it is widely anticipated that substantial numbers of long distance customers will seek to purchase local, interexchange and other services from a single carrier as part of a combined or full service package, any competitive disadvantage, inability to profitably provide local service at competitive rates or delays or limitations in providing local service or combined service packages could adversely affect AT&T's future revenues and earnings. In any event, the simultaneous entrance of numerous new competitors for interexchange and combined service packages is likely to adversely affect AT&T's future long distance revenues and could adversely affect future earnings. Furthermore, in February 1997, a General Agreement on Trade in Services (the "GATS") was reached under the World Trade Organization. The GATS, which became effective January 1, 1998, is designed to open each country's domestic telecommunications markets to foreign competitors. The GATS, and future trade agreements, may accelerate the entrance into the U.S. market of foreign telecommunications providers, certain of whom are likely to possess dominant home market positions in which there is not effective competition. The GATS may also permit AT&T's entrance into other markets as only a small number of countries refused to eliminate their foreign ownership restrictions. In addition to the matters referred to above, various other factors, including market acceptance, start-up and ongoing costs associated with the provision of new services and local conditions and obstacles, could adversely affect the timing and success of AT&T's entrance into the local exchange services market and AT&T's ability to offer combined service packages that include local service. FORWARD LOOKING STATEMENTS Except for the historical statements and discussions contained herein, statements contained in this Report on Form 10-K constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Any Form 10-K, Annual Report to Shareholders, Form 10-Q or Form 8-K of AT&T may include forward looking statements. In addition, other written or oral statements which constitute forward looking statements have been made and may in the future be made by or on behalf of AT&T, including statements concerning future operating performance, AT&T's share of new and existing markets, AT&T's short- and long-term revenue and earnings growth rates, and general industry growth rates and AT&T's performance relative thereto. These forward looking statements rely on a number of assumptions concerning future events, including the outcome of litigation, 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. These factors include, but are not limited to: - - the efficacy of the rules and regulations to be adopted by the FCC and state public regulatory agencies to implement the provisions of the Telecommunications Act; the outcome of litigation relative thereto; and the impact of regulatory changes relating to access reform and international settlement reform; - - the outcome of negotiations with LECs and state regulatory arbitrations and approvals with respect to interconnection agreements; and the ability to purchase unbundled network elements or wholesale services from LECs at a price sufficient to permit the profitable offering of local exchange service at competitive rates; - - success and market acceptance for new initiatives, many of which are untested; the level and timing of the growth and profitability of new initiatives, particularly local (consumer and business) service and business data service; start-up costs associated with entering new markets, including advertising and promotional efforts; successful deployment of new systems and applications to support new initiatives; and local conditions and obstacles; - - competitive pressures, including pricing pressures, technological developments, alternative routing developments, and the ability to offer combined service packages that include local service; the extent and pace at which different competitive environments develop for each segment of the telecommunications industry; the extent at and duration for which competitors from each segment of the telecommunications industry are able to offer combined or full service packages prior to AT&T being able to; and the degree to which AT&T experiences material competitive impacts to its traditional service offerings prior to achieving adequate local service entry; - - the availability, terms and deployment of capital; the impact of regulatory and competitive developments on capital outlays; the ability to achieve cost savings and realize productivity improvements; the ability to effectively integrate TCG's operations with AT&T; the ability to realize cost-saving and revenue synergies from the merger; and - - general economic conditions, government and regulatory policies, and business conditions in the communications industry. Readers are cautioned not to put undue reliance on such forward looking statements. For a more detailed description of these and additional uncertainties and other factors that could cause actual results to differ materially from such forward looking statements, see "Results of Operations", "Financial Condition", "Regulatory and Legislative Developments", and "Competition" included in or incorporated by reference into this Form 10-K. As described elsewhere in this Form 10-K, these uncertainties and factors could adversely affect the timing and success of AT&T's entrance into the local exchange services market and AT&T's ability to offer combined service packages that include local service, thereby adversely affecting AT&T's future revenues and earnings. 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. SEGMENT, OPERATING REVENUE AND RESEARCH AND DEVELOPMENT EXPENSE INFORMATION For information about the Company's research and development expense, see Note 5 to the Consolidated Financial Statements. For information about the consolidated operating revenues contributed by the Company's major classes of products and services, see the revenue tables and descriptions on pages 28 through 30 and Consolidated Statements of Income on page 40 of the Company's annual report to shareholders for the year ended December 31, 1997. All such information is incorporated herein by reference pursuant to General Instruction G(2). EMPLOYEE RELATIONS At December 31, 1997 AT&T employed approximately 128,000 persons in its operations, approximately 122,000 of whom are located domestically. About 48% of the domestically located employees of AT&T are represented by unions. Of those so represented, about 96% are represented by the Communications Workers of America ("CWA"), which is affiliated with the AFL-CIO; about 4% by the International Brotherhood of Electrical Workers ("IBEW"), which is also affiliated with the AFL-CIO. In addition, there is a very small remainder of domestic employees represented by other unions. Labor agreements with most of these unions extend through May 1998. ITEM 2. PROPERTIES. The properties of AT&T consist primarily of plant and equipment used to provide long distance and wireless telecommunications services and administrative office buildings. Telecommunications plant and equipment consists of: central office equipment, including switching and transmission equipment; connecting lines (cables, wires, poles, conduits, etc.); land and buildings; and miscellaneous properties (work equipment, furniture, plant under construction, etc.). The majority of the connecting lines are on or under public roads, highways and streets and international and territorial waters. The remainder are on or under private property. AT&T also operates a number of sales offices, customer care centers, and other facilities, such as research and development laboratories. AT&T continues to manage the deployment and utilization of its assets in order to meet its global growth objectives while at the same time ensuring that these assets are generating economic value added for the shareholder. AT&T will continue to manage its asset base consistent with globalization initiatives, marketplace forces, productivity growth and technology change. A substantial number of the administrative offices of AT&T are in leased buildings. Substantially all of the important long distance communications facilities are in buildings wholly owned by AT&T or in buildings owned partially by AT&T and partially by the regional holding companies created at divestiture. Many of the smaller facilities are in rented quarters. Most of the important buildings used in connection with long distance services are on land held in fee, but a few are on land held under long-term leases. ITEM 3. LEGAL PROCEEDINGS. In the normal course of business, AT&T is subject to proceedings, lawsuits and other claims, including proceedings under government laws and regulations related to environmental and other matters. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, AT&T is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at December 31, 1997. While these matters could affect operating results of any one quarter when resolved in future periods, it is management's opinion that after final disposition, any monetary liability or financial impact to AT&T beyond that provided for at year-end would not be material to AT&T's annual consolidated financial position or results of operations. On July 6, 1997, MCI Telecommunications Corp. and Ronald A. Katz Technology Licensing, L.P. filed suit in United States District Court in Philadelphia, Pennsylvania against AT&T. The suit alleges that a number of AT&T services infringe patents owned by Katz but licensed to MCI for enforcement against AT&T. AT&T is reviewing the allegations of the Complaint. Based on review to date, it is management's opinion that the claims do not present any material monetary liability or financial impact to AT&T that is not subject to patent indemnity agreements with third-party equipment vendors. AT&T is also a named party in a number of environmental actions, none of which is material to the consolidated financial statements or business of the Company. In addition, pursuant to the Separation and Distribution Agreement by and among AT&T, Lucent, and NCR, dated as of February 1, 1996, and amended and restated as of March 29, 1996, Lucent has assumed liability, subject to the liability sharing provisions of that agreement, for a number of actions in which AT&T remains a named party. AT&T is working to be released as a party to these actions, although there can be no assurance that it will be successful in this regard. There are four environmental proceedings which are required to be reported pursuant to Instruction 5.C. of Item 103 of Regulation S-K. In September 1997, the government of the U.S. Virgin Islands filed suit in the federal district court of the Virgin Islands against the Company, AT&T Submarine Systems International ("SSI International"), A&L Underground, Inc., a contractor for SSI International at that time, and other entities. In connection with the purported 1996 release of non-toxic bentonite drilling mud within the coastal region of St. Croix by the contractor, the suit seeks penalties for violations of various federal and Virgin Island statutes; damages under several statutory and common law theories; removal of the mud (which has since been completed to the satisfaction of the federal agency that ordered the cleanup); and restitution of response costs allegedly incurred by the Virgin Islands. SSI International was a wholly owned subsidiary of AT&T at the time of the alleged violation. The foregoing environmental proceeding is not material to the consolidated financial statements or business of the Company and would not be reported but for Instruction 5 C. of Item 103 of Regulation S-K, which requires disclosure of such matters. In addition, three proceedings involve matters for which Lucent has assumed liability, as described above. On July 31, 1991, the United States Environmental Protection Agency Region III issued a complaint pursuant to Section 3008a of the Resource Conservation and Recovery Act alleging violations of various waste management regulations at the Company's Richmond Works, Richmond, Virginia. The complaint seeks a total of $4.2 million in penalties. In addition, on July 31, 1991, the United States Environmental Protection Agency filed a civil complaint in the U.S. District Court for the Southern District of Illinois against the Company and nine other parties seeking enforcement of its Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") Section 106 cleanup order, issued in November 1990 for the NL Granite City Superfund site, Granite, Illinois, past costs, civil penalties of $25,000 per day and treble damages related to certain United States' costs. Finally, during 1994, AT&T Nassau Metals Corporation ("Nassau"), a wholly owned subsidiary of AT&T, and the New York State Department of Environmental Conservation ("NYSDEC") were engaged in negotiations over a study and cleanup of the Nassau plant located on Richmond Valley Road in Staten Island, New York. During these negotiations, in June 1994, NYSDEC presented Nassau with a draft consent order which included not only provisions relating to site investigation and remediation but also a provision for payment of a $3.5 million penalty for alleged violations of hazardous waste management regulations. No formal proceeding has been commenced by NYSDEC. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. No matter was submitted to a vote of security holders in the fourth quarter of the fiscal year covered by this report. Executive Officers of the Registrant (as of March 25, 1998) Became AT&T Executive Name Age Officer On - ---- --- ----------- C. Michael Armstrong* . 59 Chairman of the Board and Chief Executive Officer . . . . . . . . . . . . . 10-97 R.C.M. Baker . . . . . 51 Executive Vice President, International . . 9-97 Harry S. Bennett . . . 53 Executive Vice President, Local Services Division . . . . . . . . . . . . . . . . . . 3-97 Harold W. Burlingame . 57 Executive Vice President, Human Resources . . 9-86 Dan R. Hesse. . . . . 44 Executive Vice President & President, AT&T Wireless Services . . . . . . . . . . . 3-97 Frank Ianna . . . . . 48 Executive Vice President, Network & Computing Services . . . . . . . . . . . . . 3-97 Jim G. Kilpatric***. . 59 Executive Vice President, Law & Government Affairs . . . . . . . . . . . . . . . . . . 11-97 Marilyn Laurie***. . . 58 Executive Vice President, Brand Strategy & Marketing Communications . . . . . . . . . 2-87 Richard J. Martin . . . 51 Executive Vice President, Public Relations . 11-97 Gail J. McGovern . . . 45 Executive Vice President, Consumer Markets Division . . . . . . . . . . . . . . . . . 1-96 David C. Nagel . . . . 53 President, AT&T Labs & Chief Technology Officer . . . . . . . . . . . . . . . . . 3-97 John C. Petrillo . . . 48 Executive Vice President, Corporate Strategy & Business Development . . . . . . . . . 1-96 Richard Roscitt . . . . 46 Executive Vice President & President, AT&T Solutions . . . . . . . . . . . . . . 9-97 Daniel E. Somers . . . 50 Senior Executive Vice President and Chief Financial Officer . . . . . . . . . . . . . 5-97 John D. Zeglis**. . . . 50 President . . . . . . . . . . . . . . . . . . 9-86 - ----------- *Chairman of the Board of Directors and Chairman of the Executive and Proxy Committees. **Member of the Board of Directors. ***Mr. Kilpatric and Ms. Laurie will retire from the Company in April 1998. All of the above executive officers have held high level managerial positions with AT&T or its affiliates for more than the past five years, except Messrs. Armstrong, Nagel and Somers. Prior to joining AT&T in October 1997, Mr. Armstrong was Chairman and Chief Executive Officer of Hughes Electronics from 1991 and prior to that time, Mr. Armstrong held various other positions with IBM, including Senior Vice President and Chairman of the board of IBM World Trade Corporation. Prior to joining AT&T in April 1996, Mr. Nagel was with Apple Computer, a computer company, serving as Senior Vice President from 1995 and General Manager from 1988 through 1995. Prior to joining AT&T in May 1997, Mr. Somers was Chairman and Chief Executive Officer for Bell Cablemedia, plc, of London for two years and from 1992 to 1995, Mr. Somers was Executive Vice President and Chief Financial Officer for Bell Canada International. PART II Items 5. through 8. The information required by these items is included in pages 25 through 56 of the Company's annual report to shareholders for the year ended December 31, 1997. Such information is incorporated herein by reference, pursuant to General Instruction G(2). The referenced information from the Company's annual report to share holders has been filed as Exhibit 13 to this document. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. There have been no changes in independent accountants and no disagreements with independent accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure during the last two years. PART III Items 10. through 13. Information regarding executive officers required by Item 401 of Regulation S-K is furnished in a separate disclosure in Part I of this report because the Company did not furnish such information in its definitive proxy statement prepared in accordance with Schedule 14A. The other information required by Items 10 through 13 is included in the Company's definitive proxy statement dated March 26, 1998, the third and fourth paragraphs on page 6, the carryover paragraph on page 7, the first, second and third full paragraphs on page 7, the second full paragraph on page 8 through the final footnote on page 13 and the last paragraph on page 23 through page 48. Such information is incorporated herein by reference, pursuant to General Instruction G(3). PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K. (a) Documents filed as a part of the report: (1) Financial Statements: Pages ----- Report of Management ...................................... * Report of Independent Accountants ......................... * Statements: Consolidated Statements of Income ..................... * Consolidated Balance Sheets ........................... * Consolidated Statements of Changes in Shareowners' Equity ................................ * Consolidated Statements of Cash Flows ................. * Notes to Consolidated Financial Statements ........... * (2) Financial Statement Schedule: Report of Independent Accountants ..................... 18 Schedule: II -- Valuation and Qualifying Accounts ............... 19 Separate financial statements of subsidiaries not consolidated and 50 percent or less owned persons are omitted since no such entity constitutes a "significant subsidiary" pursuant to the provisions of Regulation S-X, Article 3-9. (3) Exhibits: Exhibits identified in parentheses below, on file with the Securities and Exchange Commission ("SEC"), are incorporated herein by reference as exhibits hereto. Exhibit Number: (3)a Restated Certificate of Incorporation of the registrant filed January 10, 1989, Certificate of Correction of the registrant filed June 8, 1989, Certificate of Change of the registrant filed March 18, 1992, Certificate of Amendment of the registrant filed June 1, 1992, and Certificate of Amendment of the registrant filed April 20, 1994. (Exhibit 4 to Registration Statement No. 333-00573). - ------------ *Incorporated herein by reference to the appropriate portions of the Company's annual report to shareholders for the year ended December 31, 1997. (See Part II.) (3)b By-Laws of the registrant, as amended January 15, 1997 (Exhibit (3)b to Form 10-K for 1996, File No. 1-1105). (4) No instrument which defines the rights of holders of long term debt, of the registrant and all of its consolidated subsidiaries, is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. (10)(i)1 Form of Separation and Distribution Agreement by and among AT&T Corp., Lucent Technologies Inc. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit (10)(i)1 to Form 10-K for 1996, File No. 1-1105). (10)(i)2 Form of Distribution Agreement, dated as of November 20, 1996, by and between AT&T Corp. and NCR Corporation (Exhibit (10)(i)2 to Form 10-K for 1996, File No. 1-1105). (10)(i)3 Tax Sharing Agreement by and among AT&T Corp., Lucent Technologies Inc. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit (10)(i)3 to Form 10-K for 1996, File No. 1-1105). (10)(i)4 Employee Benefits Agreement by and between AT&T Corp. and Lucent Technologies Inc., dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit (10)(i)4 to Form 10-K for 1996, File No. 1-1105). (10)(i)5 Form of Employee Benefits Agreement, dated as of November 20, 1996, between AT&T Corp. and NCR Corporation (Exhibit (10)(i)5 to Form 10-K for 1996, File No. 1-1105). (10)(ii)(B)1 General Purchase Agreement between AT&T Corp. and Lucent Technologies Inc., dated February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit (10) ii)(B)1 to Form 10-K for 1996, File No. 1-1105). (10)(ii)(B)2 Form of Volume Purchase Agreement, dated as of November 20, 1996, by and between AT&T Corp. and NCR Corporation (Exhibit (10)(ii)(B)2 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)1 AT&T Short Term Incentive Plan as amended March, 1994 (Exhibit (10)(iii)(A)1 to Form 10-K for 1994, File No. 1-1105). (10)(iii)(A)2 AT&T 1987 Long Term Incentive Program as amended December 17, 1997. (10)(iii)(A)3 AT&T Senior Management Individual Life Insurance Program as amended March 3, 1998. (10)(iii)(A)4 AT&T Senior Management Long Term Disability and Survivor Protection Plan, as amended and restated effective January 1, 1995 (Exhibit (10)(iii)(A)4 to Form 10-K for 1996, File No. 1-1105). . (10)(iii)(A)5 AT&T Senior Management Financial Counseling Program dated December 29, 1994 (Exhibit (10)(iii)(A)5 to Form 10-K for 1994, File No. 1-1105). (10)(iii)(A)6 AT&T Deferred Compensation Plan for Non-Employee Directors, as amended December 15, 1993 (Exhibit (10) (iii)(A)6 to Form 10-K for 1993, File No. 1-1105). (10)(iii)(A)7 The AT&T Directors Individual Life Insurance Program as amended March 2, 1998. (10)(iii)(A)8 AT&T Plan for Non-Employee Directors' Travel Accident Insurance (Exhibit (10)(iii)(A)8 to Form 10-K for 1990, File No. 1-1105). (10)(iii)(A)9 AT&T Excess Benefit and Compensation Plan, as amended and restated effective October 1, 1996 (Exhibit (10) (iii)(A)9 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)10 AT&T Non-Qualified Pension Plan, as amended and restated January 1, 1995 (Exhibit (10)(iii)(A)10 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)11 AT&T Senior Management Incentive Award Deferral Plan, as amended December 17, 1997. (10)(iii)(A)12 AT&T Mid-Career Hire Program revised effective January 1, 1988 (Exhibit (10)(iii)(A)4 to Form SE, dated March 25, 1988, File No. 1-1105) including AT&T Mid-Career Pension Plan, as amended and restated October 1, 1996 (Exhibit (10)(iii)(A)(12) to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)13 AT&T 1997 Long Term Incentive Program as amended December 17, 1997. (10)(iii)(A)14 Form of Indemnification Contract for Officers and Directors (Exhibit (10)(iii)(A)6 to Form SE, dated March 25, 1987, File No. 1-1105). (10)(iii)(A)15 Pension Plan for AT&T Non-Employee Directors revised February 20, 1989 (Exhibit (10)(iii)(A)15 to Form 10-K for 1993, File No. 1-1105). (10)(iii)(A)16 AT&T Corp. Senior Management Basic Life Insurance Program, as amended February 27, 1998. (10)(iii)(A)17 Form of AT&T Benefits Protection Trust Agreement (Exhibit (10)(iii)(A)17 to Form SE, dated March 25, 1992, File No. 1-1105). (10)(iii)(A)18 AT&T Senior Officer Severance Plan effective October 9, 1997, as amended October 30, 1997. (10)(iii)(A)19 Form of Pension Agreement between AT&T Corp. and Frank Ianna dated October 30, 1997. (10)(iii)(A)20 Form of Pension Agreement between AT&T Corp. and Gail J. McGovern dated October 30, 1997. (10)(iii)(A)21 Form of Pension Agreement between AT&T Corp. and John C. Petrillo dated October 30, 1997. (10)(iii)(A)22 Form of Pension Agreement between AT&T Corp. and John Zeglis dated May 7, 1997. (10)(iii)(A)23 Form of Employment Agreement between AT&T Corp. and C. Michael Armstrong dated October 17, 1997. (12) Computation of Ratio of Earnings to Fixed Charges. (13) Specified portions (pages 25 through 56) of the Company's Annual Report to Shareholders for the year ended December 31, 1997. (21) List of subsidiaries of AT&T. (23) Consent of Coopers & Lybrand L.L.P. (24) Powers of Attorney executed by officers and directors who signed this report. (27) Financial Data Schedules. AT&T will furnish, without charge, to a shareholder upon request a copy of the annual report to shareholders and the proxy statement, portions of which are incorporated herein by reference thereto. AT&T will furnish any other exhibit at cost. (b) Reports on Form 8-K: During the fourth quarter 1997, Form 8-K dated October 20, 1997 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits) on October 24, 1997, Form 8-K dated October 20, 1997 was filed pursuant to Item 5 (Other Events) on November 4, 1997 and Form 8-K dated December 18, 1997 was filed pursuant to Item 2 (Acquisition or Disposition of Assets) and Item 7 (Financial Statements and Exhibits) on December 23, 1997. REPORT OF INDEPENDENT ACCOUNTANTS To the Shareowners of AT&T Corp.: Our report on the consolidated financial statements of AT&T Corp. and subsidiaries has been incorporated by reference in this Form 10-K from page 39 of the 1997 Annual Report to the Shareowners of AT&T Corp. In connection with our audits of such financial statements, we have also audited the related consolidated financial statement schedule listed in the index on page 14 of this Form 10-K. In our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. 1301 Avenue of the Americas New York, New York January 26, 1998 Schedule II--Sheet 1 AT&T CORP. AND ITS CONSOLIDATED SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (Millions of Dollars)
- ------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E - ------------------------------------------------------------------------------------------------------- Balance at Charged to Balance Beginning Costs and at End Description of Period Expenses Deductions(a) of Period - ------------------------------------------------------------------------------------------------------- Year 1997 Allowances for doubtful accounts (b) ..... $ 994 $1,957 $1,925 $1,026 Reserves related to business restructuring, including force and facility consolidation (c) ..........$1,388 $ -- $ 481 $ 907 Deferred tax asset valuation allowance ... $ 166 $ 48 $ 2 $ 212 Year 1996 Allowances for doubtful accounts (b) ..... $ 832 $1,938 $1,776 $ 994 Reserves related to business restructuring, including force and facility consolidation (c) ......... $2,092 $ -- $ 704 $1,388 Deferred tax asset valuation allowance ... $ 129 $ 39 $ 2 $ 166 The Notes on Sheet 2 are an integral part of this Schedule.
Schedule II--Sheet 2 AT&T CORP. AND ITS CONSOLIDATED SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (Millions of Dollars)
- ------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E - ------------------------------------------------------------------------------------------------------- Balance at Charged to Balance Beginning Costs and at End Description of Period Expenses Deductions(a) of Period - ------------------------------------------------------------------------------------------------------- Year 1995 Allowances for doubtful accounts (b) ..... $ 611 $1,613 $1,392 $ 832 Reserves related to business restructuring, including force and facility consolidation (c) ......... $ 699 $1,712 $ 319 $2,092 Deferred tax asset valuation allowance ... $ 36 $ 109 $ 16 $ 129 - ------------ (a) Amounts written off as uncollectible, net of recoveries. (b) Includes allowances for doubtful accounts on long-term receivables of $49 $52 and $35 in 1997, 1996 and 1995, respectively (included in long-term receivables in the Consolidated Balance Sheets). (c) Included primarily in other current liabilities and in other long-term liabilities and deferred credits in the Consolidated Balance Sheets.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By: M. J. Wasser Vice President - Law and Secretary March 26, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Principal Executive Officers: # # C. Michael Armstrong Chairman # of the Board and # Chief Executive # Officer # # John Zeglis President and # Director # # Principal Financial Officer: # # Daniel E. Somers Senior Executive # Vice President and# Chief Financial # Officer # # Principal Accounting Officer: # # Maureen B. Tart Vice President ## By M. J. Wasser and Controller # (attorney-in-fact)* # Directors: # # March 26, 1998 Kenneth T. Derr # M. Kathryn Eickhoff # Walter Y. Elisha # George M. C. Fisher # Donald V. Fites # Ralph S. Larsen # Donald F. McHenry # Michael I. Sovern # Thomas H. Wyman # Exhibit Index Exhibit Number: (3)b By-Laws of the registrant, as amended January 15, 1997 (Exhibit (3)b to Form 10-K for 1996, File No. 1-1105). (4) No instrument which defines the rights of holders of long term debt, of the registrant and all of its consolidated subsidiaries, is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. (10)(i)1 Form of Separation and Distribution Agreement by and among AT&T Corp., Lucent Technologies Inc. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit (10)(i)1 to Form 10-K for 1996, File No. 1-1105). (10)(i)2 Form of Distribution Agreement, dated as of November 20, 1996, by and between AT&T Corp. and NCR Corporation (Exhibit (10)(i)2 to Form 10-K for 1996, File No. 1-1105). (10)(i)3 Tax Sharing Agreement by and among AT&T Corp., Lucent Technologies Inc. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit (10)(i)3 to Form 10-K for 1996, File No. 1-1105). (10)(i)4 Employee Benefits Agreement by and between AT&T Corp. and Lucent Technologies Inc., dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit (10)(i)4 to Form 10-K for 1996, File No. 1-1105). (10)(i)5 Form of Employee Benefits Agreement, dated as of November 20, 1996, between AT&T Corp. and NCR Corporation (Exhibit (10)(i)5 to Form 10-K for 1996, File No. 1-1105). (10)(ii)(B)1 General Purchase Agreement between AT&T Corp. and Lucent Technologies Inc., dated February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit (10)(ii)(B)1 to Form 10-K for 1996, File No. 1-1105). (10)(ii)(B)2 Form of Volume Purchase Agreement, dated as of November 20, 1996, by and between AT&T Corp. and NCR Corporation (Exhibit (10)(ii)(B)2 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)1 AT&T Short Term Incentive Plan as amended March, 1994 (Exhibit (10)(iii)(A)1 to Form 10-K for 1994, File No. 1-1105). (10)(iii)(A)2 AT&T 1987 Long Term Incentive Program as amended December 17, 1997. (10)(iii)(A)3 AT&T Senior Management Individual Life Insurance Program as amended March 3, 1998. (10)(iii)(A)4 AT&T Senior Management Long Term Disability and Survivor Protection Plan, as amended and restated effective January 1, 1995 (Exhibit (10)(iii)(A)4 to Form 10-K for 1996, File No. 1-1105). . (10)(iii)(A)5 AT&T Senior Management Financial Counseling Program dated December 29, 1994 (Exhibit (10)(iii)(A)5 to Form 10-K for 1994, File No. 1-1105). (10)(iii)(A)6 AT&T Deferred Compensation Plan for Non-Employee Directors, as amended December 15, 1993 (Exhibit (10) (iii)(A)6 to Form 10-K for 1993, File No. 1-1105). (10)(iii)(A)7 The AT&T Directors Individual Life Insurance Program as amended March 2, 1998. (10)(iii)(A)8 AT&T Plan for Non-Employee Directors' Travel Accident Insurance (Exhibit (10)(iii)(A)8 to Form 10-K for 1990, File No. 1-1105). (10)(iii)(A)9 AT&T Excess Benefit and Compensation Plan, as amended and restated effective October 1, 1996 (Exhibit (10) (iii)(A)9 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)10 AT&T Non-Qualified Pension Plan, as amended and restated January 1, 1995 (Exhibit (10)(iii)(A)10 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)11 AT&T Senior Management Incentive Award Deferral Plan, as amended December 17, 1997. (10)(iii)(A)12 AT&T Mid-Career Hire Program revised effective January 1, 1988 (Exhibit (10)(iii)(A)4 to Form SE, dated March 25, 1988, File No. 1-1105) including AT&T Mid-Career Pension Plan, as amended and restated October 1, 1996 (Exhibit (10)(iii)(A)(12) to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)13 AT&T 1997 Long Term Incentive Program as amended December 17, 1997. (10)(iii)(A)14 Form of Indemnification Contract for Officers and Directors (Exhibit (10)(iii)(A)6 to Form SE, dated March 25, 1987, File No. 1-1105). (10)(iii)(A)15 Pension Plan for AT&T Non-Employee Directors revised February 20, 1989 (Exhibit (10)(iii)(A)15 to Form 10-K for 1993, File No. 1-1105). (10)(iii)(A)16 AT&T Corp. Senior Management Basic Life Insurance Program, as amended February 27, 1998. (10)(iii)(A)17 Form of AT&T Benefits Protection Trust Agreement (Exhibit (10)(iii)(A)17 to Form SE, dated March 25, 1992, File No. 1-1105). (10)(iii)(A)18 AT&T Senior Officer Severance Plan effective October 9, 1997, as amended October 30, 1997. (10)(iii)(A)19 Form of Pension Agreement between AT&T Corp. and Frank Ianna dated October 30, 1997. (10)(iii)(A)20 Form of Pension Agreement between AT&T Corp. and Gail J. McGovern dated October 30, 1997. (10)(iii)(A)21 Form of Pension Agreement between AT&T Corp. and John C. Petrillo dated October 30, 1997. (10)(iii)(A)22 Form of Pension Agreement between AT&T Corp. and John Zeglis dated May 7, 1997. (10)(iii)(A)23 Form of Employment Agreement between AT&T Corp. and C. Michael Armstrong dated October 17, 1997. (12) Computation of Ratio of Earnings to Fixed Charges. (13) Specified portions (pages 25 through 56) of the Company's Annual Report to Shareholders for the year ended December 31, 1997. (21) List of subsidiaries of AT&T. (23) Consent of Coopers & Lybrand L.L.P. (24) Powers of Attorney executed by officers and directors who signed this report. (27) Financial Data Schedules. EX-10 2 EXHIBIT (10)(III)(A)(2) THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS DOCUMENT IS DATED NOVEMBER 22, 1991 AT&T 1987 LONG TERM INCENTIVE PROGRAM (as amended December 17, 1997) SECTION 1. PURPOSE. The purposes of the AT&T 1987 Long Term Incentive Program (the "Plan") are to encourage selected key employees of American Telephone and Telegraph Company (the "Company") and its Affiliates to acquire a proprietary and vested interest in the growth and performance of the Company, to generate an increased incentive to contribute to the Company's future success and prosperity, thus enhancing the value of the Company for the benefit of share owners, and to enhance the ability of the Company and its Affiliates to attract and retain individuals of exceptional managerial talent upon whom, in large measure, the sustained progress, growth and profitability of the Company depends. SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have the meanings set forth below: (a) "Affiliate" shall mean (i) any Person that directly, or through one or more intermediaries, controls, or is controlled by, or is under common control with, the Company or (ii) any entity in which the Company has a significant equity interest, as determined by the Committee. (b) "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock Award, Performance Share, Performance Unit, Dividend Equivalent, Other Stock Unit Award, or any other right, interest, or option relating to Shares or other securities of the Company granted pursuant to the provisions of the Plan. (c) "Award Agreement" shall mean any written agreement, contract, or other instrument or document evidencing any Award granted by the Committee hereunder and signed by both the Company and the Participant. (d) "Board" shall mean the Board of Directors of the Company. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" shall mean the Compensation Committee of the Board, composed of not less than three directors each of whom is a Disinterested Person. (g) "Company" shall mean American Telephone and Telegraph Company. (h) "Disinterested Person" shall have the meaning set forth in Rule 16b-3(d)(3) promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934 as amended, or any successor definition adopted by the Commission. (i) "Dividend Equivalent" shall mean any right granted pursuant to Section 13(h) hereof. (j) "Employee" shall mean any salaried employee of the Company or of any Affiliate. (k) "Fair Market Value" shall mean, with respect to any property, the market value of such property determined by such methods or procedures as shall be established from time to time by the Committee. (l) "Incentive Stock Option" shall mean an Option granted under Section 6 hereof that is intended to meet the requirements of Section 422A of the Code or any successor provision thereto. (m) "Nonstatutory Stock Option" shall mean an Option granted under Section 6 hereof that is not intended to be an Incentive Stock Option. (n) "Option" shall mean any right granted to a Participant under the Plan allowing such Participant to purchase Shares at such price or prices and during such period or periods as the Committee shall determine. (o) "Other Stock Unit Award" shall mean any right granted to a Participant by the Committee pursuant to Section 10 hereof. (p) "Participant" shall mean an Employee who is selected by the Committee to receive an award under the Plan. (q) "Performance Award" shall mean any Award of Performance Shares or Performance Units pursuant to Section 9 hereof. (r) "Performance Period" shall mean that period established by the Committee at the time any Performance Award is granted or at any time thereafter during which any performance goals specified by the Committee with respect to such Award are to be measured. (s) "Performance Share" shall mean any grant pursuant to Section 9 hereof of a unit valued by reference to a designated number of Shares, which value may be paid to the Participant by delivery of such property as the Committee shall determine, including, without limitation, cash, Shares, or any combination thereof, upon achievement of such performance goals during the Performance Period as the Committee shall establish at the time of such grant or thereafter. (t) "Performance Unit" shall mean any grant pursuant to Section 9 hereof of a unit valued by reference to a designated amount of property other than Shares, which value may be paid to the Participant by delivery of such property as the Committee shall determine, including, without limitation, cash, Shares, or any combination thereof, upon achievement of such performance goals during the Performance Period as the Committee shall establish at the time of such grant or thereafter. (u) "Person" shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, or government or political subdivision thereof. (v) "Restricted Stock" shall mean any Share issued with the restriction that the holder may not sell, transfer, pledge, or assign such Share and with such other restrictions as the Committee, in its sole discretion, may impose (including, without limitation, any restriction on the right to vote such Share, and the right to receive any cash dividends), which restrictions may lapse separately or in combination at such time or times, in installments or otherwise, as the Committee may deem appropriate. (w) "Restricted Stock Award" shall mean an award of Restricted Stock under Section 8 hereof. (x) "Senior Manager" shall mean any manager of the Company or any Affiliate holding a position above salary grade 14 or any future salary grade that is the equivalent thereof. (y) "Shares" shall mean the common shares of the Company, $1.00 par value, and such other securities of the company as the Committee may from time to time determine. (z) "Stock Appreciation Right" shall mean any right granted to a Participant pursuant to Section 7 hereof to receive, upon exercise by the Participant, the excess of (i) the Fair Market Value of one Share on the date of exercise or, if the Committee shall so determine in the case of any such right other than one related to any Incentive Stock Option, at any time during a specified period before the date of exercise over (ii) the grant price of the right on the date of grant, or if granted in connection with an outstanding Option on the date of grant of the related Option, as specified by the Committee in its sole discretion, which shall not be less than the Fair Market Value of one Share on such date of grant of the right or the related Option, as the case may be. Any payment by the Company in respect of such right may be made in cash, Shares, other property, or any combination thereof, as the Committee, in its sole discretion, shall determine. SECTION 3. ADMINISTRATION. The Plan shall be administered by the Committee. The Committee shall have full power and authority, subject to such orders or resolutions not inconsistent with the provisions of the Plan as may from time to time be adopted by the Board, to: (i) select the Employees of the Company and its Affiliates to whom Awards may from time to time be granted hereunder; (ii) determine the type or types of Award to be granted to each Participant hereunder; (iii) determine the number of Shares to be covered by each Award granted hereunder; (iv) determine the terms and conditions, not inconsistent with the provisions of the Plan, of any Award granted hereunder; (v) determine whether, to what extent and under what circumstances Awards may be settled in cash, Shares or other property or cancelled or suspended; (vi) determine whether, to what extent and under what circumstances cash, Shares and other property and other amounts payable with respect to an Award under this Plan shall be deferred either automatically or at the election of the Participant; (vii) interpret and administer the Plan and any instrument or agreement entered into under the Plan; (viii) establish such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for administration of the Plan. Decisions of the Committee shall be final, conclusive and binding upon all persons, including the Company, any Participant, any shareholder, and any employee of the Company or of any Affiliate. A majority of the members of the Committee may determine its actions and fix the time and place of its meetings. SECTION 4. SHARES SUBJECT TO THE PLAN. (a) Subject to adjustment as provided in Section 4(b), the total number of Shares available for grant under the Plan in each calendar year shall be three-fifths of one percent (0.6%) of the total outstanding Shares as of the first day of such year for which the Plan is in effect; PROVIDED that such number shall be increased in any year by the number of Shares available for grant hereunder in previous years but not covered by Awards granted hereunder in such years; and PROVIDED, FURTHER that no more than twenty million (20,000,000) Shares shall be cumulatively available for the grant of Incentive Stock Options under the Plan. In addition, any Shares issued by the Company through the assumption or substitution of outstanding grants from an acquired company shall not reduce the shares available for grants under the Plan. Any Shares issued hereunder may consist, in whole or in part, of authorized and unissued shares or treasury shares. If any Shares subject to any Award granted hereunder are forfeited or such Award otherwise terminates without the issuance of such Shares or of other consideration in lieu of such Shares, the Shares subject to such Award, to the extent of any such forfeiture or termination, shall again be available for grant under the Plan. (b) In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, or other change in corporate structure affecting the Shares, such adjustment shall be made in the aggregate number and class of Shares which may be delivered under the Plan, in the number, class and option price of Shares subject to outstanding Options granted under the Plan, and in the value of, or number or class of Shares subject to, Awards granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, PROVIDED that the number of Shares subject to any Award shall always be a whole number. SECTION 5. ELIGIBILITY. Any Employee (excluding any member of the Committee) shall be eligible to be selected as a Participant. SECTION 6. STOCK OPTIONS. Options may be granted hereunder to Participants either alone or in addition to other Awards granted under the Plan. Any Option granted under the Plan shall be evidenced by an Award Agreement in such form as the Committee may from time to time approve. Any such Option shall be subject to the following terms and conditions and to such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall deem desirable: (a) OPTION PRICE. The purchase price per Share purchasable under an Option shall be determined by the Committee in its sole discretion; PROVIDED that such purchase price shall not be less than the Fair Market Value of the Share on the date of the grant of the Option. (b) OPTION PERIOD. The term of each Option shall be fixed by the Committee in its sole discretion; PROVIDED that no Incentive Stock Option shall be exercisable after the expiration of ten years from the date the Option is granted. (c) EXERCISABILITY. Options shall be exercisable at such time or times as determined by the Committee at or subsequent to grant. Unless otherwise determined by the Committee at or subsequent to grant, no Incentive Stock Option shall be exercisable during the year ending on the day before the first anniversary date of the granting of the Incentive Stock Option. (d) METHOD OF EXERCISE. Subject to the other provisions of the Plan and any applicable Award Agreement, any Option may be exercised by the Participant in whole or in part at such time or times, and the Participant may make payment of the option price in such form or forms, including, without limitation, payment by delivery of cash, Shares or other consideration (including, where permitted by law and the Committee, Awards) having a Fair Market Value on the exercise date equal to the total option price, or by any combination of cash, Shares and other consideration as the Committee may specify in the applicable Award Agreement. (e) INCENTIVE STOCK OPTIONS. In accordance with rules and procedures established by the Committee, the aggregate Fair Market Value (determined as of the time of grant) of the Shares with respect to which Incentive Stock Options held by any Participant which are granted after December 31, 1986, and exercisable for the first time by such Participant during any calendar year under the Plan (and under any other benefit plans of the Company or of any parent or subsidiary corporation of the Company) shall not exceed $100,000 or, if different, the maximum limitation in effect at the time of grant under Section 422A of the Code, or any successor provision, and any regulations promulgated thereunder. The terms of any Incentive Stock Option granted hereunder shall comply in all respects with the provisions of Section 422A of the Code, or any successor provision, and any regulations promulgated thereunder. (f) FORM OF SETTLEMENT. In its sole discretion, the Committee may provide, at the time of grant, that the shares to be issued upon an Option's exercise shall be in the form of Restricted Stock or other similar securities, or may reserve the right so to provide after the time of grant. SECTION 7. STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may be granted hereunder to Participants either alone or in addition to other Awards granted under the Plan and may, but need not, relate to a specific Option granted under Section 6. The provisions of Stock Appreciation Rights need not be the same with respect to each recipient. Any Stock Appreciation Right related to a Nonstatutory Stock Option may be granted at the same time such Option is granted or at any time thereafter before exercise or expiration of such Option. Any Stock Appreciation Right related to an Incentive Stock Option must be granted at the same time such Option is granted. In the case of any Stock Appreciation Right related to any Option, the Stock Appreciation Right or applicable portion thereof shall terminate and no longer be exercisable upon the termination or exercise of the related Option, except that a Stock Appreciation Right granted with respect to less than the full number of Shares covered by a related Option shall not be reduced until the exercise or termination of the related Option exceeds the number of shares not covered by the Stock Appreciation Right. Any Option related to any Stock Appreciation Right shall no longer be exercisable to the extent the related Stock Appreciation Right has been exercised. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it shall deem appropriate. SECTION 8. RESTRICTED STOCK. (a) ISSUANCE. Restricted Stock Awards may be issued hereunder to Participants, for no cash consideration or for such minimum consideration as may be required by applicable law, either alone or in addition to other Awards granted under the Plan. The provisions of Restricted Stock Awards need not be the same with respect to each recipient. (b) REGISTRATION. Any Restricted Stock issued hereunder may be evidenced in such manner as the Committee in its sole discretion shall deem appropriate, including, without limitation, book-entry registration or issuance of a stock certificate or certificates. In the event any stock certificate is issued in respect of shares of Restricted Stock awarded under the Plan, such certificate shall be registered in the name of the Participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award. (c) FORFEITURE. Except as otherwise determined by the Committee at the time of grant, upon termination of employment for any reason during the restriction period, all shares of Restricted Stock still subject to restriction shall be forfeited by the Participant and reacquired by the Company; PROVIDED that in the event of a Participant's retirement, permanent disability, other termination of employment or death, or in cases of special circumstances, the Committee may, in its sole discretion, when it finds that a waiver would be in the best interests of the Company, waive in whole or in part any or all remaining restrictions with respect to such Participant's shares of Restricted Stock. Unrestricted Shares, evidenced in such manner as the Committee shall deem appropriate, shall be issued to the grantee promptly after the period of forfeiture, as determined or modified by the Committee, and shall expire without forfeiture in respect of such shares of Restricted Stock. SECTION 9. PERFORMANCE AWARDS. Performance Awards may be issued hereunder to Participants, for no cash consideration or for such minimum consideration as may be required by applicable law, either alone or in addition to other Awards granted under the Plan. The performance criteria to be achieved during any Performance Period and the length of the Performance Period shall be determined by the Committee upon the grant of each Performance Award. Except as provided in Section 11, Performance Awards will be distributed only after the end of the relevant Performance Period. Performance Awards may be paid in cash, Shares, other property or any combination thereof, in the sole discretion of the Committee at the time of payment. The performance levels to be achieved for each Performance Period and the amount of the Award to be distributed shall be conclusively determined by the Committee. Performance Awards may be paid in a lump sum or in installments following the close of the Performance Period or, in accordance with procedures established by the Committee, on a deferred basis. SECTION 10. OTHER STOCK UNIT AWARDS. (a) STOCK AND ADMINISTRATION. Other Awards of Shares and other Awards that are valued in whole or in part by reference to, or are otherwise based on, Shares or other property ("Other Stock Unit Awards") may be granted hereunder to Participants, either alone or in addition to other Awards granted under the Plan. Other Stock Unit Awards may be paid in Shares, other securities of the Company, cash or any other form of property as the Committee shall determine. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees of the Company and its Affiliates to whom and the time or times at which such Awards shall be made, the number of shares of Stock to be granted pursuant to such Awards, and all other conditions of the Awards. The provisions of Other Stock Unit Awards need not be the same with respect to each recipient. (b) TERMS AND CONDITIONS. Subject to the provisions of this Plan and any applicable Award Agreement, Shares subject to Awards made under this Section 10, may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the Shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses. Shares (including securities convertible into Shares) granted under this Section 10 may be issued for no cash consideration or for such minimum consideration as may be required by applicable law; Shares (including securities convertible into Shares) purchased pursuant to a purchase right awarded under this Section 10 shall be purchased for such consideration as the Committee shall in its sole discretion determine, which shall not be less than the Fair Market Value of such Shares or other securities as of the date such purchase right is awarded. SECTION 11. CHANGE IN CONTROL. (a) In order to maintain the Participants' rights in the event of any Change in Control of the Company, as hereinafter defined, the Committee, as constituted before such Change in Control, may, in its sole discretion, as to any Award, either at the time an Award is made hereunder or any time thereafter, take any one or more of the following actions: (i) provide for the acceleration of any time periods relating to the exercise or realization of any such Award so that such Award may be exercised or realized in full on or before a date fixed by the Committee; (ii) provide for the purchase of any such Award, upon the Participant's request, for an amount of cash equal to the amount that could have been attained upon the exercise of such Award or realization of the Participant's rights had such Award been currently exercisable or payable; (iii) make such adjustment to any such Award then outstanding as the Committee deems appropriate to reflect such Change in Control; or (iv) cause any such Award then outstanding to be assumed, or new rights substituted therefor, by the acquiring or surviving corporation after such Change in Control. The Committee may, in its discretion, include such further provisions and limitations in any agreement documenting such Awards as it may deem equitable and in the best interests of the Company. (b) A "Change in Control" shall be deemed to have occurred if (a) there shall have been a change in the composition of the Board such that at any time a majority of the Board shall have been members of the Board for less than twenty-four months, unless the election of each new director who was not a director at the beginning of the period was approved by at least two-thirds of the directors then still in office who were directors at the beginning of such period (but in no event by fewer than three such directors); or (b) any Person acquires 30% or more of the outstanding common shares of the Company. SECTION 12. AMENDMENTS AND TERMINATION. The Board may amend, alter or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made that would impair the rights of an optionee or Participant under an Award theretofore granted, without the optionee's or Participant's consent, or that without the approval of the Stockholders would: (a) except as is provided in Section 4(b) of the Plan, increase the total number of shares reserved for the purpose of the Plan; or (b) change the employees or class of employees eligible to participate in the Plan. The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of any Participant without his consent. The Committee may also substitute new Awards for previously granted Awards, including without limitation previously granted Options having higher option prices. SECTION 13. GENERAL PROVISIONS. (a) Unless the Committee determines otherwise at the time the Award is granted or thereafter: (i) no Award, and no Shares subject to Awards described in Section 10 which have not been issued or as to which any applicable restriction, performance or deferral period has not lapsed, may be sold, assigned, transferred, pledged or otherwise encumbered, except by will or by the laws of descent and distribution; provided that, if so determined by the Committee, a Participant may, in the manner established by the Committee, designate a beneficiary to exercise the rights of the Participant with respect to any Award upon the death of the Participant; and (ii) each Award shall be exercisable, during the Participant's lifetime, only by the Participant or, if permissible under applicable law, by the Participant's guardian or legal representative. (b) The term of each Award shall be for such period of months or years from the date of its grant as may be determined by the Committee; PROVIDED that in no event shall the term of any Incentive Stock Option or any Stock Appreciation Right related to any Incentive Stock Option exceed a period of ten (10) years from the date of its grant. (c) No Employee or Participant shall have any claim to be granted any Award under the Plan and there is no obligation for uniformity of treatment of Employees or Participants under the Plan. (d) The prospective recipient of any Award under the Plan shall not, with respect to such Award, be deemed to have become a Participant, or to have any rights with respect to such Award, until and unless such recipient shall have executed an agreement or other instrument evidencing the Award and delivered a fully executed copy thereof to the Company, and otherwise complied with the then applicable terms and conditions. (e) The Committee shall be authorized to make adjustments in performance award criteria or in the terms and conditions of other Awards in recognition of unusual or nonrecurring events affecting the Company or its financial statements or changes in applicable laws, regulations or accounting principles. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem desirable to carry it into effect. In the event the Company shall assume outstanding employee benefit awards or the right or obligation to make future such awards in connection with the acquisition of another corporation or business entity, the Committee may, in its discretion, make such adjustments in the terms of Awards under the Plan as it shall deem appropriate. (f) The Committee shall have full power and authority to determine whether, to what extent and under what circumstances any Award shall be canceled or suspended. In addition, all outstanding Awards to any Participant shall be canceled if the Participant, without the consent of the Company, while employed by the Company or after termination of such employment, establishes a relationship with a competitor of the Company or engages in activity which is in conflict with or adverse to the interest of the Company, as determined under the AT&T Non-Competition Guideline. (g) All certificates for Shares delivered under the Plan pursuant to any Award shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares are then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (h) Subject to the provisions of this Plan and any Award Agreement, the recipient of an Award (including, without limitation, any deferred Award) may, if so determined by the Committee, be entitled to receive, currently or on a deferred basis, interest or dividends, or interest or dividend equivalents, with respect to the number of shares covered by the Award, as determined by the Committee, in its sole discretion, and the Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional Shares or otherwise reinvested. (i) Except as otherwise required in any applicable Award Agreement or by the terms of the Plan, recipients of Awards under the Plan shall not be required to make any payment or provide consideration other than the rendering of services. (j) The Committee may delegate to one or more Senior Managers or a committee of Senior Managers the right to grant Awards to Employees who are not officers or directors of the Company and to cancel or suspend Awards to Employees who are not officers or directors of the Company. (k) The Company shall be authorized to withhold from any Award granted or payment due under the Plan the amount of withholding taxes due in respect of an Award or payment hereunder and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. (l) Nothing contained in this Plan shall prevent the Board of Directors from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. (m) The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of New York and applicable Federal law. (n) If any provision of this Plan is or becomes or is deemed invalid, illegal or unenforceable in any jurisdiction, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan, it shall be stricken and the remainder of the Plan shall remain in full force and effect. SECTION 14. EFFECTIVE DATE OF PLAN. The Plan shall be effective as of July 15, 1987. SECTION 15. TERM OF PLAN. No Award shall be granted pursuant to the Plan after 10 years from the date of shareowner approval, but any Award theretofore granted may extend beyond that date. EX-10 3 EXHIBIT (10)(III)(A)(3) AGREEMENT SENIOR MANAGEMENT INDIVIDUAL LIFE INSURANCE PROGRAM AND COLLATERAL ASSIGNMENT THIS AGREEMENT is entered into this day of __________19__, by and between AT&T Corp., a New York corporation, (hereinafter referred to as "the Employer" in Part I or "Assignee" in Part II), and INSTRUCTIONS -- Trustee as Policyholder: Check this box and fill in the blanks to the right of it if the initial Policyholder will be a trustee acting for the benefit of the Employee. ___ /__/ _____________________________________________ (hereinafter referred (Name of Trustee) to as the "Policyholder"), trustee for ____________________________ (Name of Employee) (hereinafter referred to as the "Employee"). INSTRUCTIONS -- Employee as Policyholder: Check this box and fill in the blank to the right of it if the initial Policyholder will be the Employee. ___ /__/ _____________________________________________ (hereinafter referred (Name of Employee) to as either the "Policyholder" or "Employee", as applicable). WHEREAS, the Employee is currently a valued employee and Senior Manager of the Employer and the Employer wishes to assist the Employee with his/her personal life insurance program; and WHEREAS, the Employee (if also the Policyholder) or otherwise, the above-named trustee, acting on behalf of the Employee, desires to accept such assistance; NOW, THEREFORE, the Employer and the Policyholder agree as follows: PART I - Individual Life Insurance Agreement 1. Description of Policy In furtherance of the purposes of the Agreement, the Policyholder will purchase and own a certain policy of life insurance on the life of the Employee, being Policy No._________ issued by the Metropolitan Life Insurance Company (hereinafter referred to as "the Insurer") in an initial face amount of $_________ with an initial annual premium of $___________ (said policy being hereinafter referred to as "the Policy"). The Policyholder's ownership shall be subject to all the terms and conditions set forth in this Agreement. 2. Payment of Premiums The Employer shall pay such part of the annual premium for such Policy (excluding the premium for any supplemental benefits not part of the Policy at initial issuance) as is equal to the amount of the annual premium which is in excess of the value of the "economic benefit" of the life insurance protection for Federal Income Tax purposes as described in Rev. Rule 64-328, Rev. Rule 66-110, and Rev. Rule 67-154. For purposes of this Section 2, "economic benefit" means the cost of the pure life insurance coverage (i.e. death benefit less any cash value) portion of the Policy. The Employer's contribution to the premium shall be reduced by any dividend used to reduce premiums. For the convenience of the parties, the Employer shall pay the entire premium directly to the Insurer. The Employee shall reimburse the Employer for that portion of the premium equal to the "economic benefit," of the life insurance protection by withholding monthly from the Employee's paycheck, pension check, or other post-employment payment received from the Employer, as applicable; provided, however, that such withholding from an Employee's pension check from the AT&T Management Pension Plan shall not exceed 10% of the gross monthly pension and shall be revocable at the request of the Employee. If the Employee shall have transferred or assigned his/her interest in the Policy to a third party, such third party (in the absence of continued payment by the Employee) shall make payment of the appropriate portion of the premium to the Employer. If the Employee is not receiving sufficient amounts from which premiums can be withheld, the Employee shall make payment of the appropriate amount directly to the Employer or to the Insurer. While this Agreement is in effect, the Employer shall maintain a schedule (a copy of which shall be open to inspection by the Employee), recording annually the portion of the premium paid by the Employer and the portion paid by the Employee. 3. Collateral Assignment and Possession of Policy To secure repayment of premiums paid by the Employer provided for in Section 2, Part II of this Agreement includes an assignment of the Policy or the Policyholder's interest therein (hereinafter "Collateral Assignment") and provides for the transfer of possession of the Policy to the Employer during the term specified in Part II of this Agreement. Except as provided in or as otherwise consistent with the provisions of this Agreement, the Employer covenants that it will not exercise its rights under the Collateral Assignment provisions of this Agreement in such a manner as to defeat the rights of the Policyholder or the policy beneficiary under this Agreement. Specifically, the Employer covenants that it will not surrender the Policy unless the Policyholder has defaulted on his/her obligations under this Agreement, or the Agreement has terminated as provided in Section 8. The Employer shall have possession of the Policy during the period that the Employer makes premium payments and until all such payments are repaid. The Employer shall make the Policy available to the Insurer in order to make any change desired by the Policyholder as to the designation of beneficiary or the selection of a settlement option, subject, however, to the Collateral Assignment provisions hereof. 4. Beneficiary Designation and Payment of Policy Proceeds The Policyholder shall have the right to name the Policy beneficiary. However, in the event of the Employee's death, the Employer shall have an interest in the Policy proceeds equal to the value of the premiums which the Employer has made to the extent not previously reimbursed, less any Policy indebtedness of the Employer to the Insurer. The balance, if any, of the proceeds of the Policy shall be paid to the beneficiary designated in the Policy by the Policyholder. 5. Procedure at Employee's Death Upon the death of the Employee while the Policy and this Agreement are in force and subject to the provisions of Parts I and II hereof, the Employer shall promptly take all necessary steps, including rendering of such assistance as may reasonably be required by the beneficiary, to obtain payment from the Insurer of the amounts payable under the Policy to the respective parties, as provided under Section 4 above. 6. Disability Waiver of Premium In the event that a supplemental agreement providing for waiver of premium in the event of disability or any additional death benefit becomes operational, the additional premium for such supplemental agreement shall be paid by the Policyholder for the benefit of the Employee. The Employer's interest in the Policy at death, under Section 4, or on surrender, under Section 9, shall be limited to total premiums paid by the Employer and not previously reimbursed less any Policy indebtedness of the Employer to the Insurer. 7. Choice of Dividend Option(s) To the extent that the Insurer declares dividends on the Policy, the Employer shall have the right to choose the option or combination of options it desires from among those offered by the Insurer as to the disposition of such dividends. The Employer shall notify the Policyholder and Insurer of its choice, and the Policyholder agrees to execute any documents necessary to choose or change the Policy's dividend option. 8. Termination of Agreement Part I of this Agreement shall terminate when the first of any of the following events occurs: (a) Termination of the Employee's employment with the Employer, for reasons other than retirement on a disability allowance or a minimum pension or after becoming retirement eligible. For purposes of this Agreement, an Employee shall be considered retirement eligible if the Employee has satisfied one of the following minimum age and length of service (as determined under the AT&T Management Pension Plan) combinations: (a) any age and 30 years of service; (b) age 50 and 25 years of service; (c) age 55 and 20 years of service; or (d) age 65 and 10 years of service; (b) The Employee's attainment of the age 65 (in some cases later) on or after retirement on a disability allowance or a minimum pension or after becoming retirement eligible or, if later, fifteen (15) years from the date of issuance of the Policy; (c) Either party's submission of written notice, to the other party, of intent to terminate Part I of this Agreement; (d) Performance of the Agreement's terms, following the death of the Employee; (e) Failure by either the Employer or the Policyholder, for any reason to make the premium contributions required under Section 2 of this Agreement; (f) Demotion of the Employee to a non-Senior Manager position; or (g) The Employee engages in any competitive activity as determined in accordance with the provisions of the AT&T Non-Competition Guideline (unless either (i) the Employee has obtained the advance written consent of the Employer's Executive Vice President-Human Resources to engage in such competitive activity as provided in the AT&T Non-Competition Guideline; or (ii) the Employer's Executive Vice President-Human Resources has waived the application of the AT&T Non-Competition Guideline to the Employee with respect to the Agreement as provided for in the AT&T Non-Competition Guideline). 9. Disposition of Policy Upon Termination of Agreement Upon the termination of this Agreement for any reason other than Section 8(d) above, the Policyholder shall have a thirty (30) day option to satisfy the Collateral Assignment regarding the Policy held by the Employer in accordance with the terms of this Section 9. The amount necessary to satisfy such Collateral Assignment shall be an amount equal to the total premium payments made, from time to time, by the Employer pursuant to Section 2 hereof, and, at the option of the Policyholder, either shall be paid directly by the Policyholder or through the Employer's collection from the cash value under the Policy. If the Policy shall then be encumbered by assignment, policy loan, or other means which have been the result of the Employer's actions, the Employer shall either remove such encumbrance, or reduce the amount necessary to satisfy the Collateral Assignment by the total amount of indebtedness outstanding against the Policy. The provisions of this Section 9 are subject to the terms of Section 6 if the Policy's supplemental agreements have been activated. If the Policyholder exercises his/her option to satisfy the Collateral Assignment, the Employer shall execute all necessary documents required by the Insurer to remove and satisfy the Collateral Assignment outstanding on the Policy. If the Policyholder does not exercise his/her option to satisfy the Collateral Assignment outstanding on the Policy, the Policyholder shall execute all documents necessary to transfer ownership of the Policy to the Employer. Such transfer shall constitute satisfaction of any obligation the Policyholder has to the Employer with respect to this Agreement. The Employer shall then pay to the Policyholder the amount, if any, by which the cash surrender value of the Policy exceeds the amount necessary to satisfy the Collateral Assignment. 10. Taxable Income The Employee is responsible for determining the amount of taxable income, if any, includable in his/her gross income for tax purposes as a result of this Agreement or coverage under the Policy. 11. Policyholder's Right to Assign His/Her Interest The Policyholder shall have the right to transfer his/her entire interest in the Policy (other than rights assigned to the Employer pursuant to this Agreement and subject to the obligations of any outstanding Collateral Assignment) to another person, trust or entity (herein the "Transferee"). If the Policyholder makes such a transfer, all his/her rights shall be vested in the Transferee and the Policyholder shall have no further interest in the Policy and Agreement. Any Transferee shall be subject to all obligations of the Policyholder under both Parts I and II of this Agreement. 12. Insurer's Obligations The Insurer is not a party to this Agreement. It is understood by the parties hereto that in issuing such Policy of insurance, the Insurer shall have no liability except as set forth in the Policy and except as set forth in any assignment of the Policy filed at its Home Office. Except as set forth in Sections 13 and 14, the Insurer shall not be bound to inquire into, or take notice of, any of the covenants herein contained as to the Policy of insurance or as to application of proceeds of such Policy. Upon the death of the Employee and payment of the proceeds in accordance with Sections 13 and 14 of this Agreement, the Insurer shall be discharged from all liability. 13. Administrative and Fiduciary Provisions AT&T Corp. shall be the administrator with respect to any rights or obligations of the Employer hereunder and shall have the authority to control and manage the operation and administration of this Agreement. The Insurer shall be the fiduciary of the Policy solely with regard to the review and final decision on the claim for benefits under the Policy, as provided in the claims procedure set forth in Section 14. 14. Claims Procedure The following claims procedure shall apply to the Policy and the Senior Management Individual Life Insurance Program: (a) Filing of a claim for benefits: The Policyholder or the beneficiary of the Policy shall make a claim for the benefits provided under the Policy in the manner provided in the Policy. (b) Claim denial: With respect to a claim for benefits under said Policy, the Insurer shall be the entity which reviews and makes decisions on claim denials according to the terms of the Policy. (c) Notification to claimant of decisions. If a claim is wholly or partially denied, notice of the decision, meeting the requirements of Section (d) following shall be furnished to the claimant within a reasonable period of time after a claim has been filed. (d) Content of notice: The Insurer shall provide, to any claimant who is denied a claim for benefits, written notice setting forth in a manner calculated to be understood by the claimant, the following: (1) The specific reason or reasons for the denial; (2) Specific reference to pertinent Policy provisions or provisions of this Agreement on which the denial is based; (3) A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (4) An explanation of this Agreement's claim review procedure, as set forth in Sections (e) and (f) following. (e) Review procedure: The purposes of the review procedure set forth in this Section and Section (f) following is to provide a method by which a claimant under the Policy and the Senior Management Individual Life Insurance Program may have a reasonable opportunity to appeal a denial of claim for a full and fair review. To accomplish that purpose, the claimant or his/her duly authorized representative: (1) May request a review upon written application to the Insurer; (2) May review the Policy or pertinent Senior Management Individual Life Insurance Program documents or agreements; and (3) May submit issues and comments in writing. A claimant, (or his/her duly authorized representative), shall request a review by filing a written application for review at any time within sixty (60) days after receipt by the claimant of written notice of the denial of the claim. (f) Decision on review. A decision on review of a denial of a claim shall be made in the following manner: (1) the decision on review shall be made by the Insurer which may, at its discretion, hold a hearing on the denied claim. The Insurer shall make its decision promptly, unless special circumstances (such as the need to hold a hearing) require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than one hundred twenty (120) days after receipt of the request for review. (2) The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, and specific references to the pertinent Policy provision or provision of this Agreement on which the decision is based. Notwithstanding any provision of the Agreement or the Policy, no Employee, Policyholder, Transferee, assignee or beneficiary may commence any action in any court regarding the Policy or the Senior Management Individual Life Insurance Program prior to pursuing all rights of Policyholder under this Section 14. PART II - Assignment of Life Insurance Policy as Collateral A. For value received and in specific consideration of the premium payments made by the Employer as set forth in Section 2 of Part I hereof, the Policyholder hereby assigns, transfers and sets over to the Employer (in this Part II referred to as the "Assignee"), its successors and assigns, the Policy issued by the Insurer upon the life of the Employee and all claims, options, privileges, rights, title and interest therein and thereunder (except as provided in Paragraph C hereof), subject to all the terms and conditions of the Policy and to all superior liens, if any, which the insurer may have against the Policy. The Policyholder by this instrument agrees and the Assignee by the acceptance of this assignment agrees to the conditions and provisions herein set forth. B. It is expressly agreed that, without detracting from the generality of the foregoing, the following specific rights are included in this Agreement and Collateral Assignment and pass to the Assignee by virtue hereof: 1. The sole right to collect from the Insurer the net proceeds of the Policy when it becomes a claim by death or maturity; 2. The sole right to surrender the Policy and receive the surrender value thereof at any time provided by the terms of the Policy and at such other times as the Insurer may allow; 3. The sole right to obtain one or more loans or advances on the Policy, either from the Insurer or, at any time, from other persons, and to pledge or assign the Policy as security for such loans or advances; 4. The sole right to collect and receive all distributions or shares of surplus, dividend deposits or additions to the Policy now or hereafter made or apportioned thereto, and to exercise any and all options contained in the Policy with respect thereto; provided, that unless and until the Assignee shall notify the Insurer in writing to the contrary, the distributions or shares of surplus, dividend deposits and additions shall continue on the Policy in force at the time of this assignment; and 5. The sole right to exercise all nonforfeiture rights permitted by the terms of the Policy or allowed by the Insurer and to receive all benefits and advantages derived therefrom. C. It is expressly agreed that the following specific rights, so long as the Policy has not been surrendered, are reserved and excluded from this Agreement and Collateral Assignment and do not pass by virtue hereof: 1. The right to collect from the Insurer any disability benefit payable in cash that does not reduce the amount of insurance or the cash value of the Policy; 2. The right to designate any change in the beneficiary; 3. The right to elect any optional mode of settlement permitted by the Policy or allowed by the Insurer; provided, however, that the reservation of these rights shall in no way impair the right of the Assignee to surrender the Policy completely with all its incidents or impair any other right of the Assignee hereunder, and any designation or change of beneficiary or election of a mode of settlement shall be made subject to this Agreement and Collateral Assignment and to the rights of the Assignee hereunder. D. This Collateral Assignment is made and the Policy is to be held as collateral security for any and all liabilities of the Policyholder to the Assignee arising under this Agreement (all of which liabilities secured to or to become secured are herein referred to as "Liabilities"). It is expressly agreed that all sums received by the Assignee hereunder whether in the event of death of the Employee, the maturity or surrender of the Policy, the obtaining of a loan or advance on the Policy, or otherwise, shall first be applied to the payment of the liability for premiums paid by the Assignee on the Policy. E. The Assignee covenants and agrees with the Policyholder as follows: 1. That any balance of sums, if any, received hereunder from the Insurer remaining after payment of the existing Liabilities, matured or unmatured, shall be paid by the Assignee to the persons entitled thereto under the terms of the Policy had this Collateral Assignment not been executed; 2. That the Assignee will not exercise either the right to surrender the Policy or the right to obtain policy loans from the Insurer, until there has been either default in any of the Liabilities pursuant to this Agreement or termination of said Agreement as therein provided; and 3. That the Assignee will, upon request, forward without reasonable delay to the Insurer the Policy for endorsement of any designation or change of beneficiary or any election of an optional mode of settlement. F. The Policyholder declares that no proceedings in bankruptcy are pending against him/her and that his/her property is not subject to any assignment for the benefit of creditors. Provisions Applicable to Parts I and II 1. Amendments Amendments may be added to this Agreement by a written agreement signed by each of the parties and attached hereto. 2. Choice of Law This Agreement shall be subject to, and construed according to, the laws of the State of New Jersey. 3. A Binding Agreement This Agreement shall bind the Employer and the Employer's successors and assigns, the Policyholder and his/her heirs, executors, administrators, and assigns (including a Transferee), and any Policy beneficiary. 4. Severability Provision The Employer and the Policyholder agree that if any provision of this Agreement is determined to be invalid or unenforceable, in whole or part, then all remaining provisions of this Agreement and, to the extent valid or enforceable, the provision in question shall remain valid, binding and fully enforceable as if the invalid or unenforceable provision, to the extent necessary, was not a part of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, including the provisions regarding Collateral Assignment, on the day and year first above written. POLICYHOLDER ______________________________ ______________________________ Signature of Witness Signature of Policyholder AT&T CORP. (As Employer and Assignee) ______________________________ ______________________________ Signature of Witness H. W. Burlingame Executive Vice President-Human Resources AT&T SENIOR MANAGEMENT INDIVIDUAL LIFE INSURANCE PROGRAM (revised 3/3/98) Program Overview The Senior Management Individual Life Insurance Program (SMILIP) is an arrangement where the Company and you purchase a permanent life insurance policy on your life and share the premium payment. If you die while AT&T is still a party to the policy, typically before you reach age 65, the death benefit is also shared between the Company and your designated beneficiary. This type of arrangement is known in the insurance industry as "Split Dollar." After attaining age 65 or if later, 15 years from the date of issuance of this policy, the Company will recoup its premium payments from the cash value build-up in the policy and cease to have any interest in the policy. The remaining cash value will be sufficient to give you a "paid-up" death benefit after attaining normal retirement age, i.e., all premiums will cease and the death benefit of the policy will be secured for the designated beneficiary with no further cost to you. At the time of enrollment your death benefit will be one-and-one-half times annual salary. Your death benefit will increase annually at 7% to approximate assumed growth in annual salary over an extended period of time. The premium cost to you will also increase to reflect your increasing age as well as the increased death benefit. The Company will pay a significant portion of the premium. Over time, the Company portion of the premium will decrease. Although this arrangement is primarily designed to pay a benefit upon your death, there is also a cash value build-up occurring coincident with the premium payments that continues after the premium payments cease. Once sufficient funds have accumulated and the Company no longer has an interest in the policy, because it has recouped its premiums, you have the option to use some or all of the remaining cash in lieu of some or all of the death benefit. Eligibility SMILIP is available to active AT&T Senior Managers. Employees who are promoted or hired into Senior Management are immediately eligible to enroll in this program. Coverage Your death benefit will automatically increase 7% on January 1 of each year to approximate salary increases. Periodically over the life of the policy this amount may be adjusted by the Company to more closely approximate your actual salary. Insurability If you enroll within 60 days of becoming a Senior Manager, you are guaranteed to be insured. If you delay enrollment proof of insurability may be required at that time before a policy can be written or coverage increased. If you are on disability (i.e., receiving Sickness and Disability Benefits) at the time of eligibility, enrollment must be delayed until you return to work. Premium Sharing/Benefit Sharing SMILIP has its origin in what the insurance industry calls a "Split Dollar" program. The term "Split Dollar" insurance comes from a concept of the Employer and the Employee sharing the premium payment on a life insurance policy on the employee. At age 65 or if later, 15 years from the date of issuance of the policy, the Company's aggregate premiums are returned from a "special" cash value built into the policy expressly for this purpose. Should you die before the Company's aggregate premiums are returned, death benefit payments are made to both the Company and your beneficiary. However, the benefit the Company receives does not reduce the death benefit paid to your beneficiary. After the Company's aggregate premiums are returned, the Company no longer has an interest in the policy. At that time you will have a "paid up" permanent life insurance policy with a cash value that can be made available to you at your option. Sample Senior Manager's Program* Current Age 50 Annual Premium Cash Value Attained Death Senior Senior Age Benefit Manager Company Manager Company - --- ------- ------- ------- ------- ------- 50 $200,000 $ 880 $17,090 0 $ 14,350 55 280,500 1,740 16,232 $ 15,700 101,000 60 393,400 4,092 13,878 85,350 178,500 64 515,700 5,364 12,606 195,700 231,000 65# 515,700 0 0 203,800 0 * This example is for illustrative purposes only and assumes a 7% annual growth in death benefit (assumed annual salary) and an 8% yield on investment for the cash value. The yield on investment is not guaranteed. # At normal retirement the death benefit becomes constant, premiums cease, the Company's aggregate premiums are returned and your cash value may continue to grow. Premium Period SMILIP is designed for premiums to be extended over a period of time to ease the impact on cash flow to both you and the Company. This period is normally from the time of your enrollment until you reach age 65, however, premiums must be paid for a minimum of 15 years. Therefore, if you enroll in the program after age 50, you and the Company will continue premium contributions until the 15 year minimum is reached. Premium Amount You will be provided with a personal illustration which reflects the Company's as well as your annual premiums through the life of the policy. Premium Waivers There are no Premium Waivers associated with this policy. Ownership There are three options: Senior Manager as Owner All paperwork must be signed by Senior Manager as proposed insured and owner. Owner at Enrollment is not the Senior Manager Another option is for you not to take ownership, but rather another, i.e., individual, trust, etc., apply for ownership of the policy. It is of particular importance that if the owner of the policy is not you, the owner must sign the applications as the "Applicant/Owner" and you must sign as the "Proposed Insured". Transfer of Ownership The owner of this policy may subsequently transfer ownership to another, i.e., an individual, trust, etc. Since ownership has long term and/or irrevocable implications, we urge you to consult with an attorney and/or tax advisor before making this decision. Cash Value This program is designed to provide you with a pre- and post-retirement death benefit. However, in addition to the death benefit, there is a cash value build-up. That is, part of each premium is placed in an "investment fund" to earn income. Investment earnings beyond the amounts necessary to increase the death benefit (as your salary increases) build on a tax advantaged basis in the policy. Cash Availability Cash Build-up Your share of the cash build-up will not begin until several years into the policy but will build quickly after that. As with any cash amount, the longer it is left intact the greater the amount will be. Loans The cash value attributed to you may be withdrawn in the form of a loan after the Company no longer has an interest in the policy. There are certain restrictions and tax implications associated with a loan. We suggest that you speak with your financial counselor/tax advisor before taking such a step. Income Stream or Lump Sum It is possible, after the Company no longer has an interest in the policy, to convert all or any portion of the policy from a death benefit to either an income "stream" (i.e., an annuity) or a lump sum cash payout. The extent to which you convert to income or cash will cancel or reduce the valuable death benefit. Once you convert, it is not possible to re-establish the original death benefit. Secured Benefit Changes to the tax law over the years have required an increasing portion of the Senior Management benefit programs to be paid from Company operating income. SMILIP allows the Company to contribute towards the cost of this program on a timely basis while securing the benefit payment from a third party (the insurance company). Early Retirement, Termination or Demotion If, at retirement, you are "Pension Eligible" or "Retirement Eligible" and you have not reached normal retirement age (65), the death benefit will continue to increase until age 65. Both you and the Company will continue to pay premiums until you reach age 65 or if later, 15 years from the date of issuance of the policy. At that time the premiums will cease and the Company's aggregate premiums will be returned to the Company. For purposes of the SMILIP, you will be considered "Pension Eligible" if you retire with a Disability Allowance or Minimum Retirement Benefit under the AT&T Senior Management Long Term Disability and Survivor Protection Plan. You will be considered "Retirement Eligible" for purposes of the SMILIP if you retire after having satisfied one of the following minimum age and length of service (as determined under the AT&T Management Pension Plan) combinations: (a) any age and 30 years of service; (b) age 50 and 25 years of service; (c) age 55 and 20 years of service; or (d) age 65 and 10 years of service. Whether or not you are Pension Eligible or Retirement Eligible, if you leave the Company, and without the Company's consent or an appropriate waiver, establish a relationship with a competitor of the Company or engage in activity in conflict with or adverse to the interests of the Company under the standards of the AT&T Non-Competition Guideline and as determined by the AT&T Executive Vice President - - Human Resources, the process will be the same as with retirement/termination without being Pension Eligible or Retirement Eligible. If you separate from the Company without being Pension Eligible, Retirement Eligible or are demoted to a non Senior Manager position, the Company's aggregate premiums will be immediately returned to the Company. You can, at your option, either maintain the policy by continuing to pay the total premium, i.e., both your amount and the amount previously paid by the Company, use the remaining cash value (if any) to buy paid up life insurance, or withdraw any remaining cash value and cancel the policy. Contractual Agreement One of the unique aspects of this insurance policy is the existence of a contract between you and AT&T. This agreement has no relationship to employment or any other benefit but rather defines the responsibilities of both the Company and you in the operation of the policy. You will own the policy and determine the beneficiary. The Company will hold the policy and have a "Collateral Assignment" from the owner (you or another you name) entitling AT&T, as long as it has a collateral interest in the policy, to an amount equal to its premiums paid. This document is a legal agreement and as such includes a significant amount of detail and warrants your careful review before signing. Although somewhat unique to life insurance, a collateral assignment is similar in context to an automobile loan where the car becomes "collateral" for the money lent to buy it. In this case, a portion of the value and benefit of the policy is the collateral the Company receives for contributing premium payments to "buy" the life insurance policy. The agreement is satisfied when the premium paid by the Company is returned. Some of the major sections of the agreement are: - Description of the policy - How the premiums are paid - How the proceeds are paid - How the agreement terminates - Claims procedure - Description of the assignment Taxes Split Dollar life insurance policies have been in existence for decades. The IRS has issued several rulings over this period which treat these policies favorably from a tax perspective. However, the Company does not assure any particular tax treatment and recommends that you review your own situation with your personal attorney and/or tax advisor. Enrollment You will be provided with enrollment documents for completion. Enrollment in SMILIP and any future changes (i.e., assignment of ownership, beneficiary change, etc.) is processed through Executive Human Resources. EX-10 4 EXHIBIT (10)(III)(A)(7) Enrollment Package (revised 3/2/98) Program Overview The Directors Individual Life Insurance Program (DILIP) is an arrangement where the Company and you purchase a permanent life insurance policy on your life and share the premium payment. If you die while AT&T is still a party to the policy, typically before you reach age 70, the death benefit is also shared between the Company and your designated beneficiary. This type of arrangement this known in the insurance industry as "Split Dollar." After attaining age 70 or if later, 15 years from the date of issuance of this policy, the Company will recoup its premium payments from the cash value build-up in the policy and cease to have any interest in the policy. The remaining cash value will be sufficient to give you a "paid-up" death benefit after attaining normal retirement age, i.e., all premiums will cease and the death benefit of the policy will be secured for the designated beneficiary with no further cost to you. At the time of enrollment your death benefit will be $100,000. Your death benefit will increase annually at 7%. The premium cost to you will also increase to reflect your increasing age as well as the increased death benefit. The Company will pay a significant portion of the premium (see the attached illustration). Over time, the Company portion of the premium will decrease. Although this arrangement is primarily designed to pay a benefit upon your death, there is also a cash value build-up occurring coincident with the premium payments that continues after the premium payments cease. Once sufficient funds have accumulated and the Company no longer has an interest in the policy, because it has recouped its premiums, you have the option to use some or all of the remaining cash in lieu of some or all of the death benefit. Eligibility DILIP is for non-employee members of the AT&T Board of Directors. Coverage The death benefit will automatically increase 7% on January 1 of each year. Insurability If you enroll within 60 days of becoming a Board Member, you are guaranteed to be insured. If you choose to delay enrollment, proof of insurability may be required at that time before a policy can be written or coverage increased. If you are on disability at the time of eligibility, enrollment must be delayed until you return to work. Premium Sharing/Benefit Sharing DILIP has its origin in what the insurance industry calls a "Split Dollar" program. The term "Split Dollar" insurance comes from a concept of the Employer and the Employee sharing the premium payment on a life insurance policy on the employee. At age 70 or if later, 15 years from the date of issuance of the policy, the Company's aggregate premiums are returned from a "special" cash value built into the policy expressly for this purpose. Should you die before the Company's aggregate premiums are returned, death benefit payments are made to both the Company and your beneficiary. However, the benefit the Company receives does not reduce the death benefit paid to your beneficiary. After the Company's aggregate premiums are returned, the Company no longer has an interest in the policy. At that time you will have a "paid up" permanent life insurance policy with a cash value that can be made available to you at your option. Example:* Sample Director's Program Current Age 55 Annual Premium Cash Value Attained Death Age Benefit Director Company Director Company - --- ------- -------- ------- -------- ------- 55 $100,000 $ 620 $10,959 0 $ 9,085 60 140,300 1,459 10,120 $ 9,362 64,447 65 196,700 3,345 8,234 52,636 112,066 69 257,900 4,384 7,195 118,594 142,495 70# 257,900 0 0 122,893 0 * This example is for illustrative purposes only and assumes a 7% annual growth in death benefit (assumed base salary) and an 8% yield on investment for the cash value. The yield on investment is not guaranteed. # At normal retirement the death benefit becomes constant, premiums cease, the Company's aggregate premiums are returned and your cash value may continue to grow. Premium Period DILIP is designed for premiums to be extended over a period of time to ease the impact on cash flow to both you and the Company. This period is normally from the time of your enrollment until you reach age 70, however, premiums must be paid for a minimum of 15 years. Therefore, if you enroll in the program after age 55, you and the Company will continue premium contributions until the minimum is reached. Premium Amount Included as an attachment is a personal illustrations. The illustration shows the Company's as well as your annual premium through the life of the policy. Premium Waivers There are no Premium Waivers associated with this policy. Ownership There are three options: Board Member as Owner --------------------- All paperwork should be signed by the Director as proposed insured and owner. Owner at Enrollment is not the Board Member ------------------------------------------- Another option is for you not to take ownership, but rather another, i.e., individual, trust, etc., apply for ownership of the policy. It is of particular importance that if the owner of the policy is not you, the owner must sign as the "Applicant/Owner" and you must sign the application as the "Proposed Insured". Transfer of Ownership --------------------- The owner of this policy may subsequently transfer ownership to another, i.e., an individual, trust, etc. Please contact Kathy Pruna at 908 630-2827 for the necessary forms and/or information. Since ownership has long term and/or irrevocable implications, we urge you to consult with an attorney and/or tax advisor before making this decision. Cash Value This program is designed to provide you with a pre- and post-retirement death benefit. However, in addition to the death benefit, there is a cash value build-up. That is, part of each premium is placed in an "investment fund" to earn income. Investment earnings beyond the amounts necessary to increase the death benefit, build on a tax advantaged basis in the policy. Cash Availability Cash Build-up Your share of the cash build-up will not begin until several years into the policy but will build quickly after that. As with any cash amount, the longer it is left intact the greater the amount will be. Loans The cash value attributed to you may be withdrawn in the form of a loan after the Company no longer has an interest in the policy. There are certain restrictions and tax implications associated with a loan. We suggest that you speak with your financial counselor/tax advisor before taking such a step. Income Stream or Lump Sum It is possible, after retirement, to convert all or any portion of the policy from a death benefit to either an income "stream" (i.e., an annuity) or a lump sum cash payout. The extent to which you convert to income or cash will cancel or reduce the valuable death benefit. Once you convert, it is not possible to re-establish the original death benefit. Early Retirement If you retire before age 70, the death benefit will continue to increase until age 70. Both you and the Company will continue to pay premiums until you reach age 70 or if later, 15 years from the date of issuance of the policy. At that time the premiums will cease and the Company's aggregate premiums will be returned to the Company. If you leave the Company and engage in competitive activity as determined by AT&T, the Company's aggregate premiums will be immediately returned to the Company. You can, at your option, either maintain the policy by continuing to pay the total premium, i.e., both your amount and the amount previously paid by the Company, use the remaining cash value (if any) to buy paid up life insurance, or withdraw any remaining cash value and cancel the policy. Contractual Agreement One of the unique aspects of this insurance policy is the existence of a contract between you and AT&T. This agreement has no relationship to employment or any other benefit but rather defines the responsibilities of both the Company and you in the operation of the policy. You will own the policy and determine who beneficiary. The Company will hold the policy and have a "Collateral Assignment" from the owner (you or another you name) entitling AT&T, as long as it has a collateral interest in the policy, to an amount equal to its premiums paid. This document is a legal agreement and as such includes a significant amount of detail and warrants your careful review before signing. Although somewhat unique to life insurance, a collateral assignment is similar in context to an automobile loan where the car becomes "collateral" for the money lent to buy it. In this case, a portion of the value and benefit of the policy is the collateral the Company receives for contributing premium payments to "buy" the life insurance policy. The agreement is satisfied when the premium paid by the Company is returned. Some of the major sections of the agreement are: - Description of the policy - How the premiums are paid - How the proceeds are paid - How the agreement terminates - Claims procedure - Description of the assignment The Agreement is included with this package. Taxes Split Dollar life insurance policies have been in existence for decades. The IRS has issued several rulings over this period which treat these policies favorably from a tax perspective. However, the Company does not assure any particular tax treatment and recommends that you review your own situation with your personal attorney and/or tax advisor. Enrollment Included with this package are the documents required for enrolling in the Directors Individual Life Insurance Program. The Application Form while appearing lengthy requires, for our purposes, just a few basic pieces of information, as does the Beneficiary Designation form. Both of these documents include instructions on how to complete. The Collateral Assignment requires signatures only. AGREEMENT DIRECTOR'S INDIVIDUAL LIFE INSURANCE PROGRAM AND COLLATERAL ASSIGNMENT THIS AGREEMENT is entered into this day of __________19__, by and between AT&T Corp., a Delaware corporation, (hereinafter referred to as "the Company" in Part I or "Assignee" in Part II), and INSTRUCTIONS -- Trustee as Policyholder: Check this box and fill in the blanks to the right of it if the initial Policyholder will be a trustee acting for the benefit of the Director. ___ /__/ ______________________________________________(hereinafter referred (Name of Trustee) to as the "Policyholder"), trustee for ___________________________ (Name of Director) (hereinafter referred to as the "Director"). INSTRUCTIONS -- Director as Policyholder: Check this box and fill in the blank to the right of it if the initial Policyholder will be the Director. ___ /__/ ______________________________________________(hereinafter referred (Name of Director) to as either the "Policyholder" or "Director", as applicable). WHEREAS, the Director is currently a valued Director of the Company and the Company wishes to assist the Director with his/her personal life insurance program; and WHEREAS, the Director (if also the Policyholder) or otherwise, the above-named trustee, acting on behalf of the Director, desires to accept such assistance; NOW, THEREFORE, the Company and the Policyholder agree as follows: PART I - Individual Life Insurance Agreement 1. Description of Policy In furtherance of the purposes of the Agreement, the Policyholder will purchase and own a certain policy of life insurance on the life of the Director, being Policy No._________ issued by the Metropolitan Life Insurance Company (hereinafter referred to as "the Insurer") in an initial face amount of $100,000 with an initial annual premium of $___________ (said policy being hereinafter referred to as "the Policy"). The Policyholder's ownership shall be subject to all the terms and conditions set forth in this Agreement. 2. Payment of Premiums The Company shall pay such part of the annual premium for such Policy (excluding the premium for any supplemental benefits not part of the Policy at initial issuance) as is equal to the amount of the annual premium which is in excess of the value of the "economic benefit" of the life insurance protection for Federal Income Tax purposes as described in Rev. Rule 64-328, Rev. Rule 66-110, and Rev. Rule 67-154. For purposes of this Section 2, "economic benefit" means the cost of the pure life insurance coverage (i.e. death benefit less any cash value) portion of the Policy. The Company's contribution to the premium shall be reduced by any dividend used to reduce premiums. For the convenience of the parties, the Company shall pay the entire premium directly to the Insurer. The Director shall reimburse the Company for that portion of the premium equal to the "economic benefit," of the life insurance protection. If the Director shall have transferred or assigned his/her interest in the Policy to a third party, such third party (in the absence of continued payment by the Director) shall make payment of the appropriate portion of the premium to the Company. While this Agreement is in effect, the Company shall maintain a schedule (a copy of which shall be open to inspection by the Director), recording annually the portion of the premium paid by the Company and the portion paid by the Director. 3. Collateral Assignment and Possession of Policy To secure repayment of premiums paid by the Company provided for in Section 2, Part II of this Agreement includes an assignment of the Policy or the Policyholder's interest therein (hereinafter "Collateral Assignment") and provides for the transfer of possession of the Policy to the Company during the term specified in Part II of this Agreement. Except as provided in or as otherwise consistent with the provisions of this Agreement, the Company covenants that it will not exercise its rights under the Collateral Assignment provisions of this Agreement in such a manner as to defeat the rights of the Policyholder or the policy beneficiary under this Agreement. Specifically, the Company covenants that it will not surrender the Policy unless the Policyholder has defaulted on his/her obligations under this Agreement, or the Agreement has terminated as provided in Section 8. The Company shall have possession of the Policy during the period that the Company makes premium payments and until all such payments are repaid. The Company shall make the Policy available to the Insurer in order to make any change desired by the Policyholder as to the designation of beneficiary or the selection of a settlement option, subject, however, to the Collateral Assignment provisions hereof. 4. Beneficiary Designation and Payment of Policy Proceeds The Policyholder shall have the right to name the Policy beneficiary. However, in the event of the Director's death, the Company shall have an interest in the Policy proceeds equal to the value of the premiums which the Company has made to the extent not previously reimbursed, less any Policy indebtedness of the Company to the Insurer. The balance, if any, of the proceeds of the Policy shall be paid to the beneficiary designated in the Policy by the Policyholder. 5. Procedure at Director's Death Upon the death of the Director while the Policy and this Agreement are in force and subject to the provisions of Parts I and II hereof, the Company shall promptly take all necessary steps, including rendering of such assistance as may reasonably be required by the beneficiary, to obtain payment from the Insurer of the amounts payable under the Policy to the respective parties, as provided under Section 4 above. 6. Disability Waiver of Premium In the event that a supplemental agreement providing for waiver of premium in the event of disability or any additional death benefit becomes operational, the additional premium for such supplemental agreement shall be paid by the Policyholder for the benefit of the Director. The Company's interest in the Policy at death, under Section 4, or on surrender, under Section 9, shall be limited to total premiums paid by the Company and not previously reimbursed less any Policy indebtedness of the Company to the Insurer. 7. Choice of Dividend Option(s) To the extent that the Insurer declares dividends on the Policy, the Company shall have the right to choose the option or combination of options it desires from among those offered by the Insurer as to the disposition of such dividends. The Company shall notify the Policyholder and Insurer of its choice, and the Policyholder agrees to execute any documents necessary to choose or change the Policy's dividend option. 8. Termination of agreement Part I of this Agreement shall terminate when the first of any of the following events occurs: (a) Termination of the Director with the Company, for reasons other than retirement; (b) The Director's attainment of the age 70 (in some cases later) on or after retirement or, if later, fifteen (15) years from the date of issuance of the Policy; (c) Either party's submission of written notice, to the other party, of intent to terminate Part I of this Agreement; (d) Performance of the Agreement's terms, following the death of the Director; (e) Failure by either the Company or the Policyholder, for any reason to make the premium contributions required under Section 2 of this Agreement; or (f) The Director engages in any competitive activity as determined in accordance with the provisions of the AT&T Non-Competition Guidelines. 9. Disposition of Policy Upon Termination of Agreement Upon the termination of this Agreement for any reason other than Section 8(d) above, the Policyholder shall have a thirty (30) day option to satisfy the Collateral Assignment regarding the Policy held by the Company in accordance with the terms of this Section 9. The amount necessary to satisfy such Collateral Assignment shall be an amount equal to the total premium payments made, from time to time, by the Company pursuant to Section 2 hereof, and, at the option of the Policyholder, either shall be paid directly by the Policyholder or through the Company's collection from the cash value under the Policy. If the Policy shall then be encumbered by assignment, policy loan, or other means which have been the result of the Company's actions, the Company shall either remove such encumbrance, or reduce the amount necessary to satisfy the Collateral Assignment by the total amount of indebtedness outstanding against the Policy. The provisions of this Section 9 are subject to the terms of Section 6 if the Policy's supplemental agreements have been activated. If the Policyholder exercises his/her option to satisfy the Collateral Assignment, the Company shall execute all necessary documents required by the Insurer to remove and satisfy the Collateral Assignment outstanding on the Policy. If the Policyholder does not exercise his/her option to satisfy the Collateral Assignment outstanding on the Policy, the Policyholder shall execute all documents necessary to transfer ownership of the Policy to the Company. Such transfer shall constitute satisfaction of any obligation the Policyholder has to the Company with respect to this Agreement. The Company shall then pay to the Policyholder the amount, if any, by which the cash surrender value of the Policy exceeds the amount necessary to satisfy the Collateral Assignment. 10. Taxable Income The Director is responsible for determining the amount of taxable income, if any, includable in his/her gross income for tax purposes as a result of this Agreement or coverage under the Policy. 11. Policyholder's Right to Assign His/Her Interest The Policyholder shall have the right to transfer his/her entire interest in the Policy (other than rights assigned to the Company pursuant to this Agreement and subject to the obligations of any outstanding Collateral Assignment) to another person, trust or entity (herein the "Transferee"). If the Policyholder makes such a transfer, all his/her rights shall be vested in the Transferee and the Policyholder shall have no further interest in the Policy and Agreement. Any Transferee shall be subject to all obligations of the Policyholder under both Parts I and II of this Agreement. 12. Insurer's Obligations The Insurer is not a party to this Agreement. It is understood by the parties hereto that in issuing such Policy of insurance, the Insurer shall have no liability except as set forth in the Policy and except as set forth in any assignment of the Policy filed at its Home Office. Except as set forth in sections 13 and 14, the Insurer shall not be bound to inquire into, or take notice of, any of the covenants herein contained as to the Policy of insurance or as to application of proceeds of such Policy. Upon the death of the Director and payment of the proceeds in accordance with Sections 13 and 14 of this Agreement, the Insurer shall be discharged from all liability. 13. Administrative and Fiduciary Provisions AT&T Corp. shall be the administrator with respect to any rights or obligations of the Company hereunder and shall have the authority to control and manage the operation and administration of this Agreement. The Insurer shall be the fiduciary of the Policy solely with regard to the review and final decision on the claim for benefits under the Policy, as provided in the claims procedure set forth in Section 14. 14. Claims Procedure The following claims procedure shall apply to the Policy and the Director's Individual Life Insurance Program: (a) Filing of a claim for benefits: The Policyholder or the beneficiary of the Policy shall make a claim for the benefits provided under the Policy in the manner provided in the Policy. (b) Claim denial: With respect to a claim for benefits under said Policy, the Insurer shall be the entity which reviews and makes decisions on claim denials according to the terms of the Policy. (c) Notification to claimant of decisions: If a claim is wholly or partially denied, notice of the decision, meeting the requirements of Section (d) following shall be furnished to the claimant within a reasonable period of time after a claim has been filed. (d) Content of notice: The Insurer shall provide, to any claimant who is denied a claim for benefits, written notice setting forth in a manner calculated to be understood by the claimant, the following: (1) The specific reason or reasons for the denial; (2) Specific reference to pertinent Policy provisions or provisions of this Agreement on which the denial is based; (3) A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (4) An explanation of this Agreement's claim review procedure, as set forth in Sections (e) and (f) following. (e) Review procedure: The purposes of the review procedure set forth in this Section and Section (f) following is to provide a method by which a claimant under the Policy and the Director's Individual Life Insurance Program may have a reasonable opportunity to appeal a denial of claim for a full and fair review. To accomplish that purpose, the claimant or his/her duly authorized representative: (1) May request a review upon written application to the Insurer; (2) May review the Policy or pertinent Director's Individual Life Insurance Program documents or agreements; and (3) May submit issues and comments in writing. A claimant, (or his/her duly authorized representative), shall request a review by filing a written application for review at any time within sixty (60) days after receipt by the claimant of written notice of the denial of the claim. (f) Decision on review. A decision on review of a denial of a claim shall be made in the following manner: (1) the decision on review shall be made by the Insurer which may, at its discretion, hold a hearing on the denied claim. The Insurer shall make its decision promptly, unless special circumstances (such as the need to hold a hearing) require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than one hundred twenty (120) days after receipt of the request for review. (2) The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, and specific references to the pertinent Policy provision or provision of this Agreement on which the decision is based. Notwithstanding any provision of the Agreement or the Policy, no Director, Policyholder, Transferee, assignee or beneficiary may commence any action in any court regarding the Policy or the Director's Individual Life Insurance Program prior to pursuing all rights of Policyholder under this Section 14. PART II - Assignment of Life Insurance Policy as Collateral A. For value received and in specific consideration of the premium payments made by the Company as set forth in Section 2 of Part I hereof, the Policyholder hereby assigns, transfers and sets over to the Company (in this Part II referred to as the "Assignee"), its successors and assigns, the Policy issued by the Insurer upon the life of the Director and all claims, options, privileges, rights, title and interest therein and thereunder (except as provided in Paragraph C hereof), subject to all the terms and conditions of the Policy and to all superior liens, if any, which the insurer may have against the Policy. The Policyholder by this instrument agrees and the Assignee by the acceptance of this assignment agrees to the conditions and provisions herein set forth. B. It is expressly agreed that, without detracting from the generality of the foregoing, the following specific rights are included in this Agreement and Collateral Assignment and pass to the Assignee by virtue hereof: 1. The sole right to collect from the Insurer the net proceeds of the Policy when it becomes a claim by death or maturity; 2. The sole right to surrender the Policy and receive the surrender value thereof at any time provided by the terms of the Policy and at such other times as the Insurer may allow; 3. The sole right to obtain one or more loans or advances on the Policy, either from the Insurer or, at any time, from other persons, and to pledge or assign the Policy as security for such loans or advances; 4. The sole right to collect and receive all distributions or shares of surplus, dividend deposits or additions to the Policy now or hereafter made or apportioned thereto, and to exercise any and all options contained in the Policy with respect thereto; provided, that unless and until the Assignee shall notify the Insurer in writing to the contrary, the distributions or shares of surplus, dividend deposits and additions shall continue on the Policy in force at the time of this assignment; and 5. The sole right to exercise all non-forfeiture rights permitted by the terms of the Policy or allowed by the Insurer and to receive all benefits and advantages derived therefrom. C. It is expressly agreed that the following specific rights, so long as the Policy has not been surrendered, are reserved and excluded from this Agreement and Collateral Assignment and do not pass by virtue hereof: 1. The right to collect from the Insurer any disability benefit payable in cash that does not reduce the amount of insurance or the cash value of the Policy; 2. The right to designate any change in the beneficiary; 3. The right to elect any optional mode of settlement permitted by the Policy or allowed by the Insurer; provided, however, that the reservation of these rights shall in no way impair the right of the Assignee to surrender the Policy completely with all its incidents or impair any other right of the Assignee hereunder, and any designation or change of beneficiary or election of a mode of settlement shall be made subject to this Agreement and Collateral Assignment and to the rights of the Assignee hereunder. D. This Collateral Assignment is made and the Policy is to be held as collateral security for any and all liabilities of the Policyholder to the Assignee arising under this Agreement (all of which liabilities secured to or to become secured are herein referred to as "Liabilities"). It is expressly agreed that all sums received by the Assignee hereunder whether in the event of death of the Director, the maturity or surrender of the Policy, the obtaining of a loan or advance on the Policy, or otherwise, shall first be applied to the payment of the liability for premiums paid by the Assignee on the Policy. E. The Assignee covenants and agrees with the Policyholder as follows: 1. That any balance of sums, if any, received hereunder from the Insurer remaining after payment of the existing Liabilities, matured or unmatured, shall be paid by the Assignee to the persons entitled thereto under the terms of the Policy had this Collateral Assignment not been executed; 2. That the Assignee will not exercise either the right to surrender the Policy or the right to obtain policy loans from the insurer, until there has been either default in any of the Liabilities pursuant to this Agreement or termination of said Agreement as therein provided; and 3. That the Assignee will, upon request, forward without reasonable delay to the Insurer the Policy for endorsement of any designation or change of beneficiary or any election of an optional mode of settlement. F. The Policyholder declares that no proceedings in bankruptcy are pending against him/her and that his/her property is not subject to any assignment for the benefit of creditors. Provisions Applicable to Parts I and II 1. Amendments Amendments may be added to this Agreement by a written agreement signed by each of the parties and attached hereto. 2. Choice of Law This Agreement shall be subject to, and construed according to, the laws of the State of New Jersey. 3. A Binding Agreement This Agreement shall bind the Company and the Company's successors and assigns, the Policyholder and his/her heirs, executors, administrators, and assigns (including a Transferee), and any Policy beneficiary. 4. Severability Provision The Company and the Policyholder agree that if any provision of this Agreement is determined to be invalid or unenforceable, in whole or part, then all remaining provisions of this Agreement and, to the extent valid or enforceable, the provision in question shall remain valid, binding and fully enforceable as if the invalid or unenforceable provision, to the extent necessary, was not a part of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, including the provisions regarding Collateral Assignment, on the day and year first above written. POLICYHOLDER _____________________________ ___________________________________ Signature of Witness Signature of Policyholder AT&T CORP. (As Employer and Assignee) _____________________________ By:________________________________ Signature of Witness H. W. Burlingame Executive Vice President-Human Resources EX-10 5 EXHIBIT (10)(III)(A)(11) AT&T SENIOR MANAGEMENT INCENTIVE AWARD DEFERRAL PLAN (as amended December 17, 1997) 1. ELIGIBILITY Any Senior Manager (as defined in the AT&T 1997 Long Term Incentive Program [the "1997 Plan"]) of AT&T Corp. ("AT&T") or an Affiliate (as defined in the 1997 Plan) who is eligible for an award under the AT&T Short Term Incentive Plan (the "Short Term Incentive Plan") and/or who has been granted a Performance Award or a Stock Unit Award under the AT&T Senior Management Long Term Incentive Plan (the "Long Term Incentive Plan") the 1987 Long Term Incentive Plan (the "1987 Plan") or the 1997 Plan shall be eligible to participate in this AT&T Senior Management Incentive Award Deferral Plan (the "Plan"). For purposes of the Plan, AT&T and any Affiliate shall be referred to as a "Participating Company". Prior to January 1, 1984, the Plan was named the Bell System Senior Management Incentive Award Deferral Plan. 2. PARTICIPATION (a) Prior to the beginning of any calendar year, any Senior Manager may elect to participate in the Plan by directing that (i) all or part of an award under the Short Term Incentive Plan, or a Performance Award or a Stock Unit Award under the Long Term Incentive Plan, the 1987 Plan or the 1997 Plan and/or (ii) all or part of the dividend equivalent payments under the Long Term Incentive Plan, the 1987 Plan or the 1997 Plan, that such employee's Participating Company would otherwise pay currently to such employee in such calendar year, shall be credited to a deferred account subject to the terms of the Plan. However, in no event shall the part of an award under any plan credited during any calendar year be less than $1,000 (based on a valuation at the time the award would otherwise be paid). There shall be no such minimum limitation on amounts credited during any calendar year that are related to dividend equivalent payments. In addition, prior to the beginning of any calendar year, any Senior Manager may elect to participate in the Plan by directing that all or part of the compensation related to the exercise (more than six months following such election and prior to the employee's retirement or other termination of employment) of an Option awarded under the 1987 Plan or the 1997 Plan shall be credited to a deferred account subject to the terms of the Plan. The exercise of an Option shall be considered as an exercise described in the preceding sentence only if the exercise would otherwise satisfy the requirements for a stock-for-stock exercise under the stock option award agreement pertaining to such Option. In addition, prior to the beginning of any calendar year, the Chairman of the Board and any other Senior Manager designated by the Chairman of the Board may elect to participate in the Plan by directing that all or part of such Senior Manager's salary that such employee's Participating Company would otherwise pay currently to such employee in such calendar year shall be credited to a deferred account subject to the terms of the Plan. In addition, provided such participation shall have been approved by the Compensation and Employee Benefits Committee of the AT&T Board of Directors (the "Committee"), prior to the beginning of any calendar year, any Senior Manager may elect to participate in the Plan as to other awards under the 1987 Plan or 1997 Plan, or other amounts of compensation of such Senior Manager, by directing that all or part of such awards or compensation that such Senior Manager's Participating Company would otherwise pay currently to such Senior Manager in such calendar year be credited to a deferred account subject to the terms of the Plan. (b) Such an election to participate in the Plan shall be in the form of a document executed by the employee and filed with the employee's Participating Company. An election related to awards, dividend equivalent payments, salary and/ or other compensation otherwise payable currently in any calendar year shall become irrevocable on the last day prior to the beginning of such calendar year. (c) Notwithstanding anything to the contrary contained in this Section 2, in the case of a Senior Manager who is newly eligible to participate in the Plan, or in the case of any Senior Manager with respect to awards or compensation newly eligible to be deferred under the Plan, a deferral election may be made with respect to compensation otherwise receivable in the same calendar year and subsequent to such election, provided such election is made within ninety (90) days of such eligibility. 3. DEFERRED ACCOUNTS (a) (i) Except as provided in Section 3(b)(iii), deferred amounts related to awards, dividend equivalent payments which would otherwise have been distributed in cash by a Participating Company and deferred amounts related to salary and/or other cash compensation shall be credited to the employee's account and shall bear interest from the date the awards, dividend equivalent payments, salary and/or other cash compensation would otherwise have been paid. The interest credited to the account will be compounded at the end of each calendar quarter, and the annual rate of interest applied at the end of any calendar quarter shall be determined by the Committee from time to time, provided however, that the interest rate to be applied, for any subsequent quarter, to an employee's (or former employee's) deferred account balance as of December 31, 1998, plus any additions to such account after December 31, 1998 that result from deferral elections made by an employee prior to December 31, 1998, (reduced by any distributions attributable to such account balance) shall not be less than the applicable 10 Year U.S. Treasury Note Rate for the prior calendar quarter, plus five (5) percent. (ii) Furthermore, if an employee made an election described in Section 2, which election was effective on December 31, 1983, then such employee's account shall also be credited during 1984 with an amount equal to the deferred amounts which would have been credited to the employee's account during 1984 had the company which employed the employee on December 31, 1983 continued to be a Participating Company during 1984, and such amount shall bear interest in accordance with (a)(i) above from the date such amount would have been credited had such company continued to be a Participating Company during 1984. (b)(i) Deferred amounts related to awards that would otherwise have been distributed in AT&T common shares by a Participating Company shall be credited to the employee's account as deferred AT&T shares. Furthermore, if an employee made an election described in Section 2, which election was effective on December 31, 1983, then such employee's account shall also be credited during 1984 with the deferred AT&T shares which would have been credited to the employee's account had the company which employed the employee on December 31, 1983 continued to be a Participating Company in the Plan and in the Long Term Incentive Plan during 1984. (ii) Deferred amounts related to the compensation on the exercise of an Option also shall be credited to the employee's account as deferred AT&T shares. The number of deferred AT&T shares credited under the preceding sentence shall equal the number of additional AT&T shares the employee would have received on the actual stock-for-stock exercise of such Option. (iii) Prior to the beginning of any calendar year, the Chairman of the Board and any other Senior Manager designated by the Chairman of the Board may elect that deferred amounts related to dividend equivalent payments, which would otherwise have been distributed in cash by a Participating Company during such calendar year, shall be credited to the employee's account as deferred AT&T shares. The number of deferred AT&T shares credited, with respect to each dividend equivalent, shall be determined in accordance with the conversion formula set forth in the following paragraph, as if such dividend equivalent were the amount to be converted to a number of additional deferred AT&T shares. (iv) The employee's account shall also be credited on each dividend payment date for AT&T shares with an amount equivalent to the dividend payable on the number of AT&T common shares equal to the number of deferred AT&T shares in the employee's account on the record date for such dividend. Such amount shall then be converted to a number of additional deferred AT&T shares determined by dividing such amount by the price of AT&T common shares, as determined in the following sentence. The price of AT&T common shares related to any dividend payment date shall be the average of the daily high and low sale prices of AT&T common shares on the New York Stock Exchange ("NYSE") for the period of five trading days ending on such dividend payment date, or the period of five trading days immediately preceding such dividend payment date if the NYSE is closed on the dividend payment date. (c) In the event of any change in outstanding AT&T common shares by reason of any stock dividend or split, recapitalization, merger, consolidation, combination or exchange of shares or other similar corporate change, the Committee shall make such adjustments, if any, that it deems appropriate in the number of deferred AT&T shares then credited to employees' accounts. Any and all such adjustments shall be conclusive and binding upon all parties concerned. 4. DISTRIBUTION (a) At the time an eligible employee makes an election to participate in the Plan, the employee shall also make an election with respect to the distribution (during the employee's lifetime or in the event of the employee's death) of the amounts credited to the employee's deferred account. Such an election related to the distribution during the employee's lifetime, of amounts otherwise payable currently in any calendar year, shall become irrevocable on the last day prior to the beginning of such calendar year. The election related to the distribution in the event of the employee's death, including the designation of a beneficiary or beneficiaries, may be changed by the employee at any time by filing the appropriate document with the Secretary of the Company. Amounts credited as cash plus accumulated interest shall be distributed in cash; amounts credited as deferred AT&T shares shall be distributed in the form of an equal number of AT&T shares. (b)(i) With respect to amounts related to deferred cash credited to the employee's account under Section 3(a), and to deferred AT&T shares credited to the employee's account under Section 3(b)(i) or (iii), an employee may elect to receive such amounts in one payment or in some other number of approximately equal annual installments (not exceeding 20), provided however, that the number of annual installments may not extend beyond the life expectancy of the employee, determined as of the date the first installment is paid. The employee's election shall also specify that the first installment (or the single payment if the employee has so elected) shall be paid either (1) as soon as practicable after the first day of the calendar quarter next following the end of the month in which the employee attains the age specified in such election, which age shall not be earlier than age 55 or later than age 70-1/2, or (2) as soon as practicable after the first day of the calendar quarter next following the end of the month in which the employee retires from a Participating Company or otherwise terminates employment with a Participating Company (except for a transfer to another Participating Company); provided, however, that the Committee may, in its sole discretion, direct that the first installment (or the single payment) shall be paid on the first day of the first calendar quarter in the calendar year next following the year of retirement or other termination of employment. In addition any Senior Manager eligible to defer salary may specify that the first installment (or the single payment if the employee has so elected) shall be paid as soon as practicable after the first day of the first calendar quarter in the calendar year next following the calendar year in which the employee retires from a Participating Company or otherwise terminates employment with a Participating Company (except for a transfer to another Participating Company). (ii) With respect to deferred AT&T shares credited to the employee's account under Section 3(b)(ii), an employee may elect to receive the deferred AT&T shares in one payment or in some other number of approximately equal annual installments (not exceeding 20), provided however, that the number of annual installments may not extend beyond the life expectancy of the employee, determined as of the date the first installment is paid. The employee's election shall also specify that the first installment (or the single payment if the employee has so elected) shall be paid as soon as practicable after the first day of the calendar quarter next following the later of (1) the end of the month that is five years following the month in which the related deferred AT&T shares were initially credited, and (2)(A) the end of the month in which the employee attains the age specified in such election, which age shall not be earlier than age 55 or later than age 70-1/2, or (B) the end of the month in which the employee retires from a Participating Company or otherwise terminates employment with a Participating Company (except for a transfer to another Participating Company); provided, however, that the Committee may, in its sole discretion, direct that the first installment (or the single payment) shall be paid on the first day of the first calendar quarter in the calendar year next following the year of retirement or other termination of employment. (c) Notwithstanding an election pursuant to Paragraph (b) of this Section 4, the entire amount then credited to an employee's account shall be paid immediately in a single payment (1) if the employee is discharged for cause by his or her Participating Company, (2) if the such Participating Company determines that the employee engaged in misconduct in connection with the employee's employment with the Participating Company, (3) if the employee without the consent of his or her Participating Company, while employed by such Participating Company or after the termination of such employment, establishes a relationship with a competitor of the Company or engages in activity which is in conflict with or adverse to the interest of the Company as determined under the AT&T Non-Competition Guideline, or (4) the employee becomes employed by a governmental agency having jurisdiction over the activities of a Participating Company or any of its subsidiaries. (d) An employee may elect that, in the event the employee should die before full payment of all amounts credited to the employee's account, the balance of the deferred amounts shall be distributed in one payment or in some other number of approximately equal annual installments (not exceeding 10) to the beneficiary or beneficiaries designated in writing by the employee, or if no designation has been made, to the estate of the employee. The first installment (or the single payment if the employee has so elected) shall be paid on the first day of the calendar quarter next following the month of death; provided, however, that the Committee may, in its sole discretion, direct that the first installment (or the single payment) shall be paid on the first day of the first calendar quarter in the calendar year next following the year of death. (e) Installments subsequent to the first installment to the employee, or to a beneficiary or to the employee's estate, shall be paid on the first day of the applicable calendar quarter in each succeeding calendar year until the entire amount credited to the employee's deferred account shall have been paid. Deferred amounts held pending distribution shall continue to be credited with interest or additional deferred AT&T shares, as applicable, determined in accordance with Section 3(a) and (b). (f) In the event an employee, or the employee's beneficiary after the employee's death, incurs a severe financial hardship, the Committee, in its sole discretion, may accelerate or otherwise revise the payment schedule from the employee's account to the extent reasonably necessary to eliminate the severe financial hardship. For the purpose of this subsection (f), a severe financial hardship must have been caused by an accident, illness, or other event beyond the control of the employee or, if applicable, the beneficiary. (g) The obligation to make a distribution of deferred amounts credited to an employee's account during any calendar year plus the additional amounts credited on such deferred amounts pursuant to Section 3(a) and (b) shall be borne by the Participating Company which otherwise would have paid the related award or salary currently. However, the obligation to make distribution with respect to deferred amounts which are related to amounts credited to an employee's account under Section 3(a)(ii) and under the second sentence of Section 3(b)(i), and with respect to which no Participating Company would otherwise have paid the related award currently, shall be borne by the Participating Company which employed the employee on January 1, 1984. 5. MISCELLANEOUS (a) The deferred amounts shall be held in the general funds of the Participating Companies. The Participating Companies shall not be required to reserve, or otherwise set aside, funds for the payment of such amounts. (b) The rights of an employee to any deferred amounts plus the additional amounts credited pursuant to Section 3(a) and (b) shall not be subject to assignment by the employee. (c) The Executive Vice President - Human Resources of AT&T shall have the authority to administer the Plan. (d) The Committee may at any time amend the Plan or terminate the Plan, but such amendment or termination shall not adversely affect the rights of any employee, without his or her consent, to any benefit under the Plan to which such employee may have previously become entitled prior to the effective date of such amendment or termination. The Executive Vice President - Human Resources of AT&T with the concurrence of the General Counsel of AT&T shall be authorized to make minor or administrative changes to the Plan, as well as amendments required by applicable federal or state law (or authorized or made desirable by such statutes). EX-10 6 EXHIBIT (10)(III)(A)(13) [OBJECT OMITTED] AT&T 1997 LONG TERM INCENTIVE PROGRAM (as amended December 17, 1997) SECTION 1. PURPOSE. The purposes of the AT&T 1997 Long Term Incentive Program (the "Plan") are to encourage selected employees of AT&T Corp. (the "Company") and its Affiliates to acquire a proprietary and vested interest in the growth and performance of the Company, to generate an increased incentive to contribute to the Company's future success and prosperity, thus enhancing the value of the Company for the benefit of shareholders, and to enhance the ability of the Company and its Affiliates to attract and retain individuals of exceptional managerial talent upon whom, in large measure, the sustained progress, growth and profitability of the Company depends. SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have the meanings set forth below: (a) "Affiliate" shall mean (i) any Person that directly, or through one or more intermediaries, controls, or is controlled by, or is under common control with, the Company or (ii) any entity in which the Company has a significant equity interest, as determined by the Committee. (b) "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock Award, Performance Share, Performance Unit, Dividend Equivalent, Other Stock Unit Award, or any other right, interest, or option relating to Shares or other property granted pursuant to the provisions of the Plan. (c) "Award Agreement" shall mean any written agreement, contract, or other instrument or document evidencing any Award granted by the Committee hereunder, which may, but need not, be executed or acknowledged by both the Company and the Participant. (d) "Board" shall mean the Board of Directors of the Company. (e) "Change in Control" shall mean the happening of any of the following events: (i) An acquisition by any individual, entity or group (within the meaning of Section 13 (d) (3) or 14 (d) (2) of the Exchange Act) (an "Entity") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); excluding, however, the following: (1) any acquisition directly from the Company, other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Company, (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (4) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section 2(e); (ii) A change in the composition of the Board such that the individuals who, as of the effective date of the Plan, constitute the Board (such Board shall be hereinafter referred to as the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that for purposes of this definition, any individual who becomes a member of the Board subsequent to the effective date of the Plan, whose election, or nomination for election, by the Company's stockholders was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; and provided, further however, that any such individual whose initial assumption of office occurs as a result of or in connection with either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of an Entity other than the Board shall not be so considered as a member of the Incumbent Board; (iii) The approval by the stockholders of the Company of a merger, reorganization or consolidation or sale or other disposition of all or substantially all of the assets of the Company (each, a "Corporate Transaction") or, if consummation of such Corporate Transaction is subject, at the time of such approval by stockholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding however, such a Corporate Transaction pursuant to which (A) all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 60% of, respectively, the outstanding shares of common stock, and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation or other Person which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries (a "Parent Company")) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Entity (other than the Company, any employee benefit plan (or related trust) of the Company, such corporation resulting from such Corporate Transaction or, if reference was made to equity ownership of any Parent Company for purposes of determining whether clause (A) above is satisfied in connection with the applicable Corporate Transaction, such Parent Company) will beneficially own, directly or indirectly, 20% or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors unless such ownership resulted solely from ownership of securities of the Company prior to the Corporate Transaction, and (C) individuals who were members of the Incumbent Board will immediately after the consummation of the Corporate Transaction constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction (or, if reference was made to equity ownership of any Parent Company for purposes of determining whether clause (A) above is satisfied in connection with the applicable Corporate Transaction, of the Parent Company); or (iv) The approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. (f) "Change in Control Price" means the higher of (A) the highest reported sales price, regular way, of a Share in any transaction reported on the New York Stock Exchange Composite Tape or other national exchange on which Shares are listed or on NASDAQ during the 60-day period prior to and including the date of a Change in Control or (B) if the Change in Control is the result of a tender or exchange offer or a Corporate Transaction, the highest price per Share paid in such tender or exchange offer or Corporate Transaction; provided however, that in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, the Change in Control Price shall be the Fair Market Value of a Share on the date such Incentive Stock Option or Stock Appreciation Right is exercised or deemed exercised pursuant to Section 11(b). To the extent that the consideration paid in any such transaction described above consists all or in part of securities or other noncash consideration, the value of such securities or other noncash consideration shall be determined in the sole discretion of the Board. (g) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. (h) "Committee" shall mean the Compensation and Employee Benefits Committee of the Board, or any successor to such committee, composed of no fewer than two directors each of whom is a Non-Employee Director and an "outside director" within the meaning of Section 162(m) of the Code, or any successor provision thereto. (i) "Company" shall mean AT&T Corp., a New York corporation. (j) "Covered Employee" shall mean a "covered employee" within the meaning of Section 162(m)(3) of the Code, or any successor provision thereto. (k) "Employee" shall mean any employee of the Company or of any Affiliate. Unless otherwise determined by the Committee in its sole discretion, for purposes of the Plan, an employee shall be considered to have terminated employment and to have ceased to be an Employee if his or her employer ceases to be an Affiliate, even if he or she continues to be employed by such employer. (l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (m) "Fair Market Value" shall mean, with respect to any property, the market value of such property determined by such methods or procedures as shall be established from time to time by the Committee. (n) "Incentive Stock Option" shall mean an Option granted under Section 6 hereof that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto. (o) "Non-Employee Director" shall have the meaning set forth in Rule 16b-3(b)(3) promulgated by the Securities and Exchange Commission under the Exchange Act, or any successor definition adopted by the Securities and Exchange Commission. (p) "Nonstatutory Stock Option" shall mean an Option granted under Section 6 hereof that is not intended to be an Incentive Stock Option. (q) "Option" shall mean any right granted to a Participant under the Plan allowing such Participant to purchase Shares at such price or prices and during such period or periods as the Committee shall determine. (r) "Other Stock Unit Award" shall mean any right granted to a Participant by the Committee pursuant to Section 10 hereof. (s) "Participant" shall mean an Employee who is selected by the Committee to receive an Award under the Plan. (t) "Performance Award" shall mean any Award of Performance Shares or Performance Units pursuant to Section 9 hereof. (u) "Performance Period" shall mean that period established by the Committee at the time any Performance Award is granted or at any time thereafter during which any performance goals specified by the Committee with respect to such Award are to be measured. (v) "Performance Share" shall mean any grant pursuant to Section 9 hereof of a unit valued by reference to a designated number of Shares, which value may be paid to the Participant by delivery of such property as the Committee shall determine, including, without limitation, cash, Shares, or any combination thereof, upon achievement of such performance goals during the Performance Period as the Committee shall establish at the time of such grant or thereafter. (w) "Performance Unit" shall mean any grant pursuant to Section 9 hereof of a unit valued by reference to a designated amount of property other than Shares, which value may be paid to the Participant by delivery of such property as the Committee shall determine, including, without limitation, cash, Shares, or any combination thereof, upon achievement of such performance goals during the Performance Period as the Committee shall establish at the time of such grant or thereafter. (x) "Person" shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, or government or political subdivision thereof. (y) "Restricted Stock" shall mean any Share issued with the restriction that the holder may not sell, transfer, pledge, or assign such Share and with such other restrictions as the Committee, in its sole discretion, may impose (including, without limitation, any restriction on the right to vote such Share, and the right to receive any cash dividends), which restrictions may lapse separately or in combination at such time or times, in installments or otherwise, as the Committee may deem appropriate. (z) "Restricted Stock Award" shall mean an award of Restricted Stock under Section 8 hereof. (Aa) "Senior Manager" shall mean any Employee of the Company or any Affiliate holding a position above E band or any future salary band that is the equivalent thereof. (Bb) "Shares" shall mean the shares of common stock of the Company, $1.00 par value. (Cc) "Stock Appreciation Right" shall mean any right granted to a Participant pursuant to Section 7 hereof to receive, upon exercise by the Participant, the excess of (i) the Fair Market Value of one Share on the date of exercise or, if the Committee shall so determine in the case of any such right other than one related to any Incentive Stock Option, at any time during a specified period before the date of exercise over (ii) the grant price of the right on the date of grant, or if granted in connection with an outstanding Option on the date of grant of the related Option, as specified by the Committee in its sole discretion, which, except in the case of Substitute Awards or in connection with an adjustment provided in Section 4(d), shall not be less than the Fair Market Value of one Share on such date of grant of the right or the related Option, as the case may be. Any payment by the Company in respect of such right may be made in cash, Shares, other property, or any combination thereof, as the Committee, in its sole discretion, shall determine. (Dd) "Subsidiary" shall mean any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the granting of the Award, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. (Ee) "Substitute Awards" shall mean Awards granted or Shares issued by the Company in assumption of, or in substitution or exchange for, awards previously granted, or the right or obligation to make future awards, by a company acquired by the Company or with which the Company combines. SECTION 3. ADMINISTRATION. The Plan shall be administered by the Committee. The Committee shall have full power and authority, subject to such orders or resolutions not inconsistent with the provisions of the Plan as may from time to time be adopted by the Board, to: (i) select the Employees of the Company and its Affiliates to whom Awards may from time to time be granted hereunder; (ii) determine the type or types of Award to be granted to each Participant hereunder; (iii) determine the number of Shares to be covered by each Award granted hereunder; (iv) determine the terms and conditions, not inconsistent with the provisions of the Plan, of any Award granted hereunder; (v) determine whether, to what extent and under what circumstances Awards may be settled in cash, Shares or other property or canceled or suspended; (vi) determine whether, to what extent and under what circumstances cash, Shares and other property and other amounts payable with respect to an Award under this Plan shall be deferred either automatically or at the election of the Participant; (vii) interpret and administer the Plan and any instrument or agreement entered into under the Plan; (viii) establish such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for administration of the Plan. Decisions of the Committee shall be final, conclusive and binding upon all persons, including the Company, any Participant, any shareholder, and any employee of the Company or of any Affiliate. A majority of the members of the Committee may determine its actions and fix the time and place of its meetings. SECTION 4. SHARES SUBJECT TO THE PLAN. (a) Subject to adjustment as provided in Section 4(d), a total of fifteen (15) million Shares shall be available for a one time grant of Options to substantially all Employees during 1997. Shares available for such one time grant of Options, but not used for such Options, shall be available for other Awards under the Plan, in 1997 or later years. (b) In addition to the number of Shares available under Section 4(a), and subject to adjustment as provided in Section 4(d), a total of eighty-five (85) million Shares shall be available for Awards granted under the Plan; provided that the number of Shares available for Awards other than Options shall not exceed fifteen (15) million; and provided, further, that if any Shares subject to an Award or to an award under the Company's 1987 Long Term Incentive Program or 1984 Stock Option Plan (the "Prior Plans") are forfeited or if any Award or award under the Prior Plans based on Shares is settled for cash, or expires or otherwise is terminated without issuance of such Shares, the Shares subject to such Award shall to the extent of such cash settlement, forfeiture or termination again be available for Awards under the Plan. In the event that any Option or other Award granted hereunder is exercised through the delivery of Shares or in the event that withholding tax liabilities arising from such Option or other Award are satisfied by the withholding of Shares by the Company, the number of Shares available for Awards under the Plan shall be increased by the number of Shares so surrendered or withheld. In addition, Substitute Awards shall not reduce the Shares available for grants under the Plan or to a Participant in any calendar year. (c) Any Shares issued hereunder may consist, in whole or in part, of authorized and unissued shares, treasury shares, or shares purchased in the open market or otherwise. (d) In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split, reverse stock split, spin-off or similar transaction or other change in corporate structure affecting the Shares, such adjustments and other substitutions shall be made to the Plan and to Awards as the Committee in its sole discretion deems equitable or appropriate, including without limitation such adjustments in the aggregate number, class and kind of securities which may be delivered under the Plan, in the aggregate or to any one Participant, in the number, class, kind and option or exercise price of securities subject to outstanding Options, Stock Appreciation Rights or other Awards granted under the Plan, and in the number, class and kind of securities subject to Awards granted under the Plan (including, if the Committee deems appropriate, the substitution of similar options to purchase the shares of, or other awards denominated in the shares of, another company) as the Committee may determine to be appropriate in its sole discretion, provided that the number of Shares subject to any Award shall always be a whole number. SECTION 5. ELIGIBILITY. Any Employee shall be eligible to be selected as a Participant. SECTION 6. STOCK OPTIONS. Options may be granted hereunder to Participants either alone or in addition to other Awards granted under the Plan. Any Option granted under the Plan shall be evidenced by an Award Agreement in such form as the Committee may from time to time approve. Any such Option shall be subject to the following terms and conditions and to such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall deem desirable: (a) OPTION PRICE. The purchase price per Share purchasable under an Option shall be determined by the Committee in its sole discretion; provided that, except in the case of Substitute Awards or in connection with an adjustment provided for in Section 4(d), such purchase price shall not be less than the Fair Market Value of the Share on the date of the grant of the Option. (b) OPTION PERIOD. The term of each Option shall be fixed by the Committee in its sole discretion; provided that no Incentive Stock Option shall be exercisable after the expiration of ten years from the date the Option is granted. (c) EXERCISABILITY. Options shall be exercisable at such time or times as determined by the Committee at or subsequent to grant. (d) METHOD OF EXERCISE. Subject to the other provisions of the Plan, any Option may be exercised by the Participant in whole or in part at such time or times, and the Participant may make payment of the option price in such form or forms, including, without limitation, payment by delivery of cash, Shares or other consideration (including, where permitted by law and the Committee, Awards) having a Fair Market Value on the exercise date equal to the total option price, or by any combination of cash, Shares and other consideration as the Committee may specify in the applicable Award Agreement. (e) INCENTIVE STOCK OPTIONS. In accordance with rules and procedures established by the Committee, and except as otherwise provided in Section 11, the aggregate Fair Market Value (determined as of the time of grant) of the Shares with respect to which Incentive Stock Options held by any Participant which are exercisable for the first time by such Participant during any calendar year under the Plan (and under any other benefit plans of the Company or any Subsidiary) shall not exceed $100,000 or, if different, the maximum limitation in effect at the time of grant under Section 422 of the Code, or any successor provision, and any regulations promulgated thereunder. Incentive Stock Options shall be granted only to participants who are employees of the Company or a Subsidiary of the Company. The terms of any Incentive Stock Option granted hereunder shall comply in all respects with the provisions of Section 422 of the Code, or any successor provision, and any regulations promulgated thereunder. (f) FORM OF SETTLEMENT. In its sole discretion, the Committee may provide, at the time of grant, that the Shares to be issued upon an Option's exercise shall be in the form of Restricted Stock or other similar securities, or may reserve the right so to provide after the time of grant. SECTION 7. STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may be granted hereunder to Participants either alone or in addition to other Awards granted under the Plan and may, but need not, relate to a specific Option granted under Section 6. The provisions of Stock Appreciation Rights need not be the same with respect to each recipient. Any Stock Appreciation Right related to a Nonstatutory Stock Option may be granted at the same time such Option is granted or at any time thereafter before exercise or expiration of such Option. Any Stock Appreciation Right related to an Incentive Stock Option must be granted at the same time such Option is granted. In the case of any Stock Appreciation Right related to any Option, the Stock Appreciation Right or applicable portion thereof shall terminate and no longer be exercisable upon the termination or exercise of the related Option, except that a Stock Appreciation Right granted with respect to less than the full number of Shares covered by a related Option shall not be reduced until the exercise or termination of the related Option exceeds the number of Shares not covered by the Stock Appreciation Right. Any Option related to any Stock Appreciation Right shall no longer be exercisable to the extent the related Stock Appreciation Right has been exercised. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it shall deem appropriate. SECTION 8. RESTRICTED STOCK. (a) ISSUANCE. A Restricted Stock Award shall be subject to restrictions imposed by the Committee during a period of time specified by the Committee (the "Restriction Period"). Restricted Stock Awards may be issued hereunder to Participants, for no cash consideration or for such minimum consideration as may be required by applicable law, either alone or in addition to other Awards granted under the Plan. The provisions of Restricted Stock Awards need not be the same with respect to each recipient. (b) REGISTRATION. Any Restricted Stock issued hereunder may be evidenced in such manner as the Committee in its sole discretion shall deem appropriate, including, without limitation, book-entry registration or issuance of a stock certificate or certificates. In the event any stock certificate is issued in respect of shares of Restricted Stock awarded under the Plan, such certificate shall be registered in the name of the Participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award. (c) FORFEITURE. Except as otherwise determined by the Committee at the time of grant or thereafter, upon termination of employment for any reason during the restriction period, all Shares of Restricted Stock still subject to restriction shall be forfeited by the Participant and reacquired by the Company. Unrestricted Shares, evidenced in such manner as the Committee shall deem appropriate, shall be issued to the grantee promptly after the period of forfeiture, as determined or modified by the Committee, shall expire. (d) MINIMUM VESTING CONDITION. The minimum Restriction Period applicable to any Restricted Stock Award that is not subject to performance conditions restricting transfer shall be three (3) years from the date of grant; provided, however, that a Restriction Period of less than three (3) years may be approved for such Awards with respect to up to five (5) million Shares under the Plan. SECTION 9. PERFORMANCE AWARDS. Performance Awards may be issued hereunder to Participants, for no cash consideration or for such minimum consideration as may be required by applicable law, either alone or in addition to other Awards granted under the Plan. The performance criteria to be achieved during any Performance Period and the length of the Performance Period shall be determined by the Committee upon the grant of each Performance Award. Except as provided in Section 11, Performance Awards will be distributed only after the end of the relevant Performance Period. Performance Awards may be paid in cash, Shares, other property or any combination thereof, in the sole discretion of the Committee at the time of payment. The performance levels to be achieved for each Performance Period and the amount of the Award to be distributed shall be conclusively determined by the Committee. Performance Awards may be paid in a lump sum or in installments following the close of the Performance Period or, in accordance with procedures established by the Committee, on a deferred basis. SECTION 10. OTHER STOCK UNIT AWARDS. (a) STOCK AND ADMINISTRATION. Other Awards of Shares and other Awards that are valued in whole or in part by reference to, or are otherwise based on, Shares or other property ("Other Stock Unit Awards") may be granted hereunder to Participants, either alone or in addition to other Awards granted under the Plan. Other Stock Unit Awards may be paid in Shares, cash or any other form of property as the Committee shall determine. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees of the Company and its Affiliates to whom and the time or times at which such Awards shall be made, the number of Shares to be granted pursuant to such Awards, and all other conditions of the Awards. The provisions of Other Stock Unit Awards need not be the same with respect to each recipient. (b) TERMS AND CONDITIONS. Subject to the provisions of this Plan and any applicable Award Agreement, Awards and Shares subject to Awards made under this Section 10, may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the Shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses. For any Award or Shares subject to any Award made under this Section 10 the transferability of which is conditioned only on the passage of time, such restriction period shall be a minimum of three (3) years. Shares (including securities convertible into Shares) subject to Awards granted under this Section 10 may be issued for no cash consideration or for such minimum consideration as may be required by applicable law. Shares (including securities convertible into Shares) purchased pursuant to a purchase right awarded under this Section 10 shall be purchased for such consideration as the Committee shall in its sole discretion determine, which, except in the case of Substitute Awards, shall not be less than the Fair Market Value of such Shares or other securities as of the date such purchase right is awarded. SECTION 11. CHANGE IN CONTROL PROVISIONS. (a) IMPACT OF EVENT. Notwithstanding any other provision of the Plan to the contrary, unless the Committee shall determine otherwise at the time of grant with respect to a particular Award, in the event of a Change in Control: (i) any Options and Stock Appreciation Rights outstanding as of the date such Change in Control is determined to have occurred, and which are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant; (ii) the restrictions and deferral limitations applicable to any Restricted Stock shall lapse, and such Restricted Stock shall become free of all restrictions and limitations and become fully vested and transferable to the full extent of the original grant; (iii) all Performance Awards shall be considered to be earned and payable in full, and any deferral or other restriction shall lapse and such Performance Awards shall be immediately settled or distributed; and (iv) The restrictions and deferral limitations and other conditions applicable to any Other Stock Unit Awards or any other Awards shall lapse, and such Other Stock Unit Awards or such other Awards hall become free of all restrictions, limitations or conditions and become fully vested and transferable to the full extent of the original grant. (b) CHANGE IN CONTROL CASH-OUT. Notwithstanding any other provision of the Plan, during the 60-day period from and after a Change in Control (the "Exercise Period"), if the Committee shall determine at, or at any time after, the time of grant, a Participant holding an Option or Stock Appreciation Right shall have the right, whether or not the Option or Stock Appreciation Right is fully exercisable and in lieu of the payment of the purchase price for the Shares being purchased under the Option or Stock Appreciation Right and by giving notice to the Company, to elect (within the Exercise Period) to surrender all or part of the Option or Stock Appreciation Right to the Company and to receive cash, within 30 days of such notice, in an amount equal to the amount by which the Change in Control Price per Share on the date of such election shall exceed the purchase price per Share under the Option or Stock Appreciation Right (the "Spread") multiplied by the number of Shares granted under the Option or Stock Appreciation right as to which the right granted under this Section 11(b) shall have been exercised. (c) Notwithstanding any other provision of this Plan, if any right granted pursuant to this Plan would make a Change in Control transaction ineligible for pooling-of-interests accounting under APB No. 16, that (after giving effect to any other actions taken to cause such transaction to be eligible for such pooling-of-interests accounting treatment) but for the nature of such right would otherwise be eligible for such accounting treatment, the Committee shall have the ability to substitute for the cash payable pursuant to such right Shares with a Fair Market Value equal to the cash that would otherwise be payable pursuant thereto. SECTION 12. CODE SECTION 162(m) PROVISIONS. (a) Notwithstanding any other provision of this Plan, if the Committee determines at the time Restricted Stock, a Performance Award or an Other Stock Unit Award is granted to a Participant who is then a Senior Manager or an E band employee that such Participant is, or is likely to be as of the end of the tax year in which the Company would claim a tax deduction in connection with such Award, a Covered Employee, then the Committee may provide that this Section 12 is applicable to such Award. (b) If an Award is subject to this Section 12, then the lapsing of restrictions thereon and the distribution of cash, Shares or other property pursuant thereto, as applicable, shall be subject to the achievement of one or more objective performance goals established by the Committee, which shall be based on the attainment of specified levels of one or any combination of the following: net cash provided by operating activities, earnings per share from continuing operations, operating income, revenues, gross margin, return on operating assets, return on equity, economic value added, stock price appreciation, total stockholder return, or cost control, of the Company or the Affiliate or division of the Company for or within which the Participant is primarily employed. Such performance goals also may be based upon the achievement of specified levels of Company performance (or performance of applicable Affiliate or division of the Company) under one or more of the measures described above relative to the performance of other corporations. Such performance goals shall be set by the Committee within the time period prescribed by, and shall otherwise comply with the requirements of, Section 162(m) of the Code, or any successor provision thereto, and the regulations thereunder. (c) Notwithstanding any provision of this Plan other than Section 11, with respect to any Award that is subject to this Section 12, the Committee may adjust downwards, but not upwards, the amount payable pursuant to such Award, and the Committee may not waive the achievement of the applicable performance goals except in the case of the death or disability of the Participant. (d) The Committee shall have the power to impose such other restrictions on Awards subject to this Section 12 as it may deem necessary or appropriate to ensure that such Awards satisfy all requirements for "performance-based compensation" within the meaning of Section 162(m) (4) (C) of the Code, or any successor provision thereto. (e) Notwithstanding any provision of this Plan other than Section 4(d), no Participant may be granted Options and/or SARs in any three calendar year period with respect to more than two million (2,000,000) Shares, and the maximum dollar value payable with respect to Performance Units and/or Other Stock Unit Awards that are valued with reference to property other than Shares and granted to any Participant in any one calendar year is $10,000,000. SECTION 13. AMENDMENTS AND TERMINATION. The Board may amend, alter, suspend, discontinue or terminate the Plan or any portion thereof at any time; provided that no such amendment, alteration, suspension, discontinuation or termination shall be made without (i) shareholder approval if such approval is necessary to qualify for or comply with any tax or regulatory requirement for which or with which the Board deems it necessary or desirable to qualify or comply or (ii) the consent of the affected Participant, if such action would impair the rights of such Participant under any outstanding Award. Notwithstanding anything to the contrary herein, the Committee may amend the Plan in such manner as may be necessary so as to have the Plan conform to local rules and regulations in any jurisdiction outside the United States. The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of any Participant without his or her consent. Notwithstanding any provision of this plan, the Committee may not amend the terms of any Option to reduce the option price. SECTION 14. GENERAL PROVISIONS. (a) Unless the Committee determines otherwise at the time the Award is granted or thereafter: (i) no Award, and no Shares subject to Awards described in Section 10 which have not been issued or as to which any applicable restriction, performance or deferral period has not lapsed, may be sold, assigned, transferred, pledged or otherwise encumbered, except by will or by the laws of descent and distribution; provided that, if so determined by the Committee, a Participant may, in the manner established by the Committee, designate a beneficiary to exercise the rights of the Participant with respect to any Award upon the death of the Participant; and (ii) each Award shall be exercisable, during the Participant's lifetime, only by the Participant or, if permissible under applicable law, by the Participant's guardian or legal representative. (b) The term of each Award shall be for such period of months or years from the date of its grant as may be determined by the Committee; provided that in no event shall the term of any Incentive Stock Option or any Stock Appreciation Right related to any Incentive Stock Option exceed a period of ten (10) years from the date of its grant. (c) No Employee or Participant shall have any claim to be granted any Award under the Plan and there is no obligation for uniformity of treatment of Employees or Participants under the Plan. (d) The prospective recipient of any Award under the Plan shall not, with respect to such Award, be deemed to have become a Participant, or to have any rights with respect to such Award, until and unless such recipient shall have executed an agreement or other instrument evidencing the Award and delivered a copy thereof to the Company, and otherwise complied with the then applicable terms and conditions. (e) Except as provided in Section 12, the Committee shall be authorized to make adjustments in performance award criteria or in the terms and conditions of other Awards in recognition of unusual or nonrecurring events affecting the Company or its financial statements or changes in applicable laws, regulations or accounting principles. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem desirable to carry it into effect. In the event the Company shall assume outstanding employee benefit awards or the right or obligation to make future such awards in connection with the acquisition of or combination with another corporation or business entity, the Committee may, in its discretion, make such adjustments in the terms of Awards under the Plan as it shall deem appropriate. (f) The Committee shall have full power and authority to determine whether, to what extent and under what circumstances any Award shall be canceled or suspended. In addition, all outstanding Awards to any Participant shall be canceled if the Participant, without the consent of the Company, while employed by the Company or after termination of such employment, establishes a relationship with a competitor of the Company or engages in activity which is in conflict with or adverse to the interest of the Company, as determined under the AT&T Non-Competition Guideline. (g) All certificates for Shares delivered under the Plan pursuant to any Award shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares are then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (h) No Award granted hereunder shall be construed as an offer to sell securities of the Company, and no such offer shall be outstanding, unless and until the Committee in its sole discretion has determined that any such offer, if made, would be in compliance with all applicable requirements of the U.S. federal securities laws and any other laws to which such offer, if made, would be subject. (i) The Committee shall be authorized to establish procedures pursuant to which the payment of any Award may be deferred. Subject to the provisions of the Plan and any Award Agreement, the recipient of an Award (including, without limitation, any deferred Award) may, if so determined by the Committee, be entitled to receive, currently or on a deferred basis, cash dividends, or cash payments in amounts equivalent to cash dividends on Shares ("dividend equivalents"), with respect to the number of Shares covered by the Award, as determined by the Committee, in its sole discretion, and the Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional Shares or otherwise reinvested. (j) Except as otherwise required in any applicable Award Agreement or by the terms of the Plan, recipients of Awards under the Plan shall not be required to make any payment or provide consideration other than the rendering of services. (k) The Committee may delegate to one or more Senior Managers or a committee of Senior Managers the right to grant Awards to Employees who are not officers or directors of the Company and to cancel or suspend Awards to Employees who are not officers or directors of the Company. (l) The Company shall be authorized to withhold from any Award granted or payment due under the Plan the amount of withholding taxes due in respect of an Award or payment hereunder and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. The Committee shall be authorized to establish procedures for election by Participants to satisfy such obligations for the payment of such taxes by delivery of or transfer of Shares to the Company, or by directing the Company to retain Shares otherwise deliverable in connection with the Award. (m) Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. (n) The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of New York and applicable Federal law. (o) If any provision of this Plan is or becomes or is deemed invalid, illegal or unenforceable in any jurisdiction, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan, it shall be stricken and the remainder of the Plan shall remain in full force and effect. (p) Awards may be granted to Employees who are foreign nationals or employed outside the United States, or both, on such terms and conditions different from those applicable to Awards to Employees employed in the United States as may, in the judgment of the Committee, be necessary or desirable in order to recognize differences in local law or tax policy. The Committee also may impose conditions on the exercise or vesting of Awards in order to minimize the Company's obligation with respect to tax equalization for Employees on assignments outside their home country. SECTION 15. EFFECTIVE DATE OF PLAN. The Plan shall be effective as of June 1, 1997. SECTION 16. TERM OF PLAN. No Award shall be granted pursuant to the Plan after May 31, 2002, but any Award theretofore granted may extend beyond that date. EX-10 7 EXHIBIT (10)(III)(A)(16) AGREEMENT SENIOR MANAGEMENT BASIC LIFE INSURANCE PROGRAM AND COLLATERAL ASSIGNMENT THIS AGREEMENT is entered into this _______ day of ____________________, 19___, by and between AT&T Corp., a New York corporation (hereinafter referred to as the "Employer" in Part I or "Assignee" in Part II), and INSTRUCTIONS - Trustee as Policyholder: Check this box and fill in the blanks to the right of it if the initial Policyholder will be a trustee acting for the benefit of the Employee. ____ /___/ __________________________________________ (hereinafter referred (Name of Trustee) to as the "Policyholder"), trustee for __________________________________________ (hereinafter referred (Name of Employee) to as the "Employee"). INSTRUCTIONS - Employee as Policyholder: Check this box and fill in the blank to the right of it if the initial Policyholder will be the Employee. ____ /___/ __________________________________________ (hereinafter referred (Name of Employee) to as either the "Policyholder" or the "Employee", as applicable). WHEREAS, the Employee is currently a valued employee and Senior Manager of the Employer and the Employer wishes to assist the Employee with his/her personal life insurance program; and WHEREAS, the Employee (if also the Policyholder) or otherwise, the above-named trustee, acting on behalf of the Employee, desires to accept such assistance; NOW, THEREFORE, the Employer and the Policyholder agree as follows: PART I - Basic Life Insurance Agreement 1. Description of Policy: In furtherance of the purposes of the Agreement, the Policyholder will purchase and own two certain policies of life insurance on the life of the Employee, being Policy No. ____________ issued by the Metropolitan Life Insurance Company, and Policy No. ____________ issued by the Pacific Life Insurance Company. Said policies are hereinafter collectively referred to as the "Policy" and said life insurance companies are hereinafter collectively referred to as the "Insurer". The Policyholder's ownership shall be subject to all the terms and conditions set forth in this Agreement. 2. Payment of Premiums: The Employer shall pay the entire annual premium for the Policy (excluding the premium for any supplemental benefits not part of the Policy at initial issuance). The Employer's contribution to the premium shall be reduced by any dividend used to reduce premiums. The Employer shall pay the entire premium directly to the Insurer. 3. Collateral Assignment and Possession of Policy: To secure repayment of premiums paid by the Employer provided for in Section 2, Part II of this Agreement includes an assignment of the Policy or the Policyholder's interest therein (hereinafter "Collateral Assignment") and provides for the transfer of possession of the Policy to the Employer during the term specified in Part II of this Agreement. Except as provided in or as otherwise consistent with the provisions of this Agreement, the Employer covenants that it will not exercise its rights under the Collateral Assignment provisions of this Agreement in such a manner as to defeat the rights of the Policyholder or the policy beneficiary under this Agreement. Specifically, the Employer covenants that it will not surrender the Policy unless the Policyholder has defaulted on his/her obligations under this Agreement, or the Agreement has terminated as provided in Section 8. The Employer shall have possession of the Policy during the period that the Employer makes premium payments and until all such payments are repaid. The Employer shall make the Policy available to the Insurer in order to make any change desired by the Policyholder as to the designation of beneficiary or the selection of a settlement option, subject, however, to the Collateral Assignment provisions hereof. 4. Beneficiary Designation and Payment of Policy Proceeds: The Policyholder shall have the right to name the Policy beneficiary. However, in the event of the Employee's death, the beneficiary designated in the Policy by the Policyholder, or the Policyholder's Transferee, shall have an interest in the Policy proceeds limited to an amount equal to the Employee's annual rate of salary payable by the Employer, rounded to the next higher $1,000 (one thousand dollars), and determined as of the date of death, or, if earlier, the date of the Employee's retirement on a disability allowance or a minimum pension or after becoming retirement eligible. The balance, if any, of the proceeds of the Policy shall be paid to the Employer. For purposes of this Agreement, an Employee shall be considered retirement eligible if the Employee has satisfied one of the following minimum age and length of service (as determined under the AT&T Management Pension Plan) combinations: (a) any age and 30 years of service; (b) age 50 and 25 years of service; (c) age 55 and 20 years of service; or (d) age 65 and 10 years of service. 5. Procedure at Employee's Death: Upon the death of the Employee while the Policy and this Agreement are in force and subject to the provisions of Parts I and II hereof, the Employer shall promptly take all necessary steps, including rendering of such assistance as may reasonably be required by the beneficiary, to obtain payment from the Insurer of the amounts payable under the Policy to the respective parties, as provided under Section 4 above. 6. Disability Waiver of Premium: In the event that a supplemental agreement providing for waiver of premium in the event of disability or any additional death benefit becomes operational, the additional premium for such supplemental agreement shall be paid by the Policyholder for the benefit of the Employee. The Employer's interest in the Policy at death, under Section 4, or on surrender, under Section 9, shall be limited to total premiums paid by the Employer and not previously reimbursed less any Policy indebtedness of the Employer to the Insurer, but in no event will the Employer's interest in the Policy on surrender exceed the cash value under the Policy. 7. Choice of Dividend Option(s): To the extent that the Insurer declares dividends on the Policy, the Employer shall have the right to choose the option or combination of options it desires from among those offered by the Insurer as to the disposition of such dividends. The Employer shall notify the Policyholder and Insurer of its choice, and the Policyholder agrees to execute any documents necessary to choose or change the Policy's dividend option. 8. Termination of Agreement: Part I of this Agreement shall terminate when the first of any of the following events occurs: (a) Termination of the Employee's employment with the Employer, for reasons other than retirement on a disability allowance or a minimum pension or after becoming retirement eligible; (b) The Employee's attainment of the age 65 (in some cases later) on or after retirement on a disability allowance or a minimum pension or after becoming retirement eligible or, if later, fifteen (15) years (in some cases later) from the date of issuance of the Policy; (c) Either party's submission of written notice, to the other party, of intent to terminate Part I of this Agreement; (d) Performance of the Agreement's terms, following the death of the Employee; (e) Failure by either the Employer or the Policyholder, for any reason, to make the premium contributions required under Section 2 of this Agreement; (f) Demotion of the Employee to a non-Senior Manager position; or (g) The Employee engages in any competitive activity as determined in accordance with the provisions of the AT&T Non-Competition Guideline (unless either (i) the Employee has obtained the advance written consent of the Employer's Executive Vice President-Human Resources to engage in such competitive activity as provided in the AT&T Non-Competition Guideline; or (ii) the Employer's Executive Vice President-Human Resources has waived the application of the AT&T Non-Competition Guideline to the Employee with respect to the Agreement as provided for in the AT&T Non-Competition Guideline). 9. Disposition of Policy Upon Termination of Agreement: Upon the termination of this Agreement for any reason other than Section 8(d) above, the Policyholder shall have a thirty (30) day option to satisfy the Collateral Assignment regarding the Policy held by the Employer in accordance with the terms of this Section 9. The amount necessary to satisfy such Collateral Assignment shall be an amount equal to the total premium payments made, from time to time, by the Employer pursuant to Section 2 hereof, and, at the option of the Policyholder, either shall be paid directly by the Policyholder or through the Employer's collection from the cash value under the Policy. If the Policy shall then be encumbered by assignment, policy loan, or other means which have been the result of the Employer's actions, the Employer shall either remove such encumbrance, or reduce the amount necessary to satisfy the Collateral Assignment by the total amount of indebtedness outstanding against the Policy. The provisions of this Section 9 are subject to the terms of Section 6 if the Policy's supplemental agreements have been activated. If the Policyholder exercises his/her option to satisfy the Collateral Assignment, the Employer shall execute all necessary documents required by the Insurer to remove and satisfy the Collateral Assignment outstanding on the Policy. If the Policyholder does not exercise his/her option to satisfy the Collateral Assignment outstanding on the Policy, the Policyholder shall execute all documents necessary to transfer ownership of the Policy to the Employer. Such transfer shall constitute satisfaction of any obligation the Policyholder has to the Employer with respect to this Agreement. The Employer shall then pay to the Policyholder the amount, if any, by which the cash surrender value of the Policy exceeds the amount necessary to satisfy the Collateral Assignment. 10. Taxable Income: The Employee is responsible for determining the amount of taxable income, if any, includable in his/her gross income for tax purposes as a result of this Agreement or coverage under the Policy. 11. Policyholder's Right to Assign His/Her Interest: The Policyholder shall have the right to transfer his/her entire interest in the Policy (other than rights assigned to the Employer pursuant to this Agreement and subject to the obligations of any outstanding Collateral Assignment) to another person, trust or entity (herein the "Transferee"). If the Policyholder makes such a transfer, all his/her rights shall be vested in the Transferee and the Policyholder shall have no further interest in the Policy and Agreement. Any Transferee shall be subject to all obligations of the Policyholder under both Parts I and II of this Agreement. 12. Insurer's Obligations: The Insurer is not a party to this Agreement. It is understood by the parties hereto that in issuing such Policy of insurance, the Insurer shall have no liability except as set forth in the Policy and except as set forth in any assignment of the Policy filed at its Home Office. Except as set forth in Sections 13 and 14, the Insurer shall not be bound to inquire into, or take notice of, any of the covenants herein contained as to the Policy of insurance or as to application of proceeds of such Policy. Upon the death of the Employee and payment of the proceeds in accordance with Sections 13 and 14 of this Agreement, the Insurer shall be discharged from all liability. 13. Administrative and Fiduciary Provisions: AT&T Corp. shall be the administrator with respect to any rights or obligations of the Employer hereunder and shall have the authority to control and manage the operation and administration of this Agreement. The Insurer shall be the fiduciary of the Policy solely with regard to the review and final decision on the claim for benefits under the Policy, as provided in the claims procedure set forth in Section 14. 14. Claims Procedure: The following claims procedure shall apply to the Policy and the Senior Management Basic Life Insurance Program: (a) Filing of a claim for benefits: The Policyholder or the beneficiary of the Policy shall make a claim for the benefits provided under the Policy in the manner provided in the Policy. (b) Claim denial: With respect to a claim for benefits under said Policy, the Insurer shall be the entity which reviews and makes decisions on claim denials according to the terms of the Policy. (c) Notification to claimant of decisions. If a claim is wholly or partially denied, notice of the decision, meeting the requirements of Section (d) following shall be furnished to the claimant within a reasonable period of time after a claim has been filed. (d) Content of notice: The Insurer shall provide, to any claimant who is denied a claim for benefits, written notice setting forth, in a manner calculated to be understood by the claimant, the following: (1) The specific reason or reasons for the denial; (2) Specific reference to pertinent Policy provisions or provisions of this Agreement on which the denial is based; (3) A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (4) An explanation of this Agreement's claim review procedure, as set forth in Sections (e) and (f) following. (e) Review procedure: The purposes of the review procedure set forth in this Section and Section (f) following is to provide a method by which a claimant under the Policy and the Senior Management Basic Life Insurance Program may have a reasonable opportunity to appeal a denial of claim for a full and fair review. To accomplish that purpose, the claimant or his/her duly authorized representative: (1) May request a review upon written application to the Insurer; (2) May review the Policy or pertinent Senior Management Basic Life Insurance Program documents or agreements; and (3) May submit issues and comments in writing. A claimant, (or his/her duly authorized representative), shall request a review by filing a written application for review at any time within sixty (60) days after receipt by the claimant of written notice of the denial of the claim. (f) Decision on review. A decision on review of a denial of a claim shall be made in the following manner: (1) The decision on review shall be made by the Insurer which may, at its discretion, hold a hearing on the denied claim. The Insurer shall make its decision promptly, unless special circumstances (such as the need to hold a hearing) require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than one hundred twenty (120) days after receipt of the request for review. (2) The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, and specific references to the pertinent Policy provision or provision of this Agreement on which the decision is based. Notwithstanding any provision of the Agreement or the Policy, no Employee, Policyholder, Transferee, assignee or beneficiary may commence any action in any court regarding the Policy or the Senior Management Basic Life Insurance Program prior to pursuing all rights of a Policyholder under this Section 14. PART II - Assignment of Life Insurance Policy as Collateral A. For value received and in specific consideration of the premium payments made by the Employer as set forth in Section 2 of Part I hereof, the Policyholder hereby assigns, transfers and sets over to the Employer (in this Part II referred to as the "Assignee"), its successors and assigns, the Policy issued by the Insurer upon the life of the Employee and all claims, options, privileges, rights, title and interest therein and thereunder (except as provided in Paragraph C hereof), subject to all the terms and conditions of the Policy and to all superior liens, if any, which the Insurer may have against the Policy. The Policyholder by this instrument agrees and the Assignee by the acceptance of this assignment agrees to the conditions and provisions herein set forth. B. It is expressly agreed that, without detracting from the generality of the foregoing, the following specific rights are included in this Agreement and Collateral Assignment and pass to the Assignee by virtue hereof: 1. The sole right to collect from the Insurer the net proceeds of the Policy when it becomes a claim by death or maturity; 2. The sole right to surrender the Policy and receive the surrender value thereof at any time provided by the terms of the Policy and at such other times as the Insurer may allow; 3. The sole right to obtain one or more loans or advances on the Policy, either from the Insurer or, at any time, from other persons, and to pledge or assign the Policy as security for such loans or advances; 4. The sole right to collect and receive all distributions or shares of surplus, dividend deposits or additions to the Policy, now or hereafter made or apportioned thereto, and to exercise any and all options contained in the Policy with respect thereto; provided, that unless and until the Assignee shall notify the Insurer in writing to the contrary, the distributions or shares of surplus, dividend deposits and additions shall continue on the Policy in force at the time of this assignment; and 5. The sole right to exercise all nonforfeiture rights permitted by the terms of the Policy or allowed by the Insurer and to receive all benefits and advantages derived therefrom. C. It is expressly agreed that the following specific rights, so long as the Policy has not been surrendered, are reserved and excluded from this Agreement and Collateral Assignment and do not pass by virtue hereof: 1. The right to collect from the Insurer any disability benefit payable in cash that does not reduce the amount of insurance or the cash value of the Policy; 2. The right to designate any change in the beneficiary; 3. The right to elect any optional mode of settlement permitted by the Policy or allowed by the Insurer; provided, however, that the reservation of these rights shall in no way impair the right of the Assignee to surrender the Policy completely with all its incidents or impair any other right of the Assignee hereunder, and any designation or change of beneficiary or election of a mode of settlement shall be made subject to this Agreement and Collateral Assignment and to the rights of the Assignee hereunder. D. This Collateral Assignment is made and the Policy is to be held as collateral security for any and all liabilities of the Policyholder to the Assignee arising under this Agreement (all of which liabilities secured to or to become secured are herein referred to as "Liabilities"). It is expressly agreed that all sums received by the Assignee hereunder whether in the event of death of the Employee, the maturity or surrender of the Policy, the obtaining of a loan or advance on the Policy, or otherwise, shall first be applied to the payment of the liability for premiums paid by the Assignee on the Policy. E. The Assignee covenants and agrees with the Policyholder as follows: 1. That any balance of sums, if any, received hereunder from the Insurer remaining after payment of the existing Liabilities, matured or unmatured, shall be paid by the Assignee to the persons entitled thereto under the terms of the Policy had this Collateral Assignment not been executed; 2. That the Assignee will not exercise either the right to surrender the Policy or the right to obtain policy loans from the Insurer, until there has been either default in any of the Liabilities pursuant to this Agreement or termination of said Agreement as herein provided; and 3. That the Assignee will, upon request, forward without reasonable delay to the Insurer the Policy for endorsement of any designation or change of beneficiary or any election of an optional mode of settlement. F. The Policyholder declares that no proceedings in bankruptcy are pending against him/her and that his/her property is not subject to any assignment for the benefit of creditors. Provisions Applicable to Parts I and II 1. Amendments: Amendments may be added to this Agreement by a written agreement signed by each of the parties and attached hereto. 2. Choice of Law: This Agreement shall be subject to, and construed according to, the laws of the State of New Jersey. 3. A Binding Agreement: This Agreement shall bind the Employer and the Employer's successors and assigns, the Policyholder and his/her heirs, executors, administrators, and assigns (including a Transferee), and any Policy beneficiary. 4. Severability Provision: The Employer and the Policyholder agree that if any provision of this Agreement is determined to be invalid or unenforceable, in whole or part, then all remaining provisions of this Agreement and, to the extent valid or enforceable, the provision in question shall remain valid, binding and fully enforceable as if the invalid or unenforceable provision, to the extent necessary, was not a part of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, including the provisions regarding Collateral Assignment, on the day and year first above written. POLICYHOLDER ______________________________ ______________________________ Signature of Witness Signature of Policyholder AT&T CORP. (As Employer and Assignee) ______________________________ By:______________________________ Signature of Witness H. W. Burlingame Executive Vice President-Human Resources AT&T SENIOR MANAGEMENT BASIC LIFE INSURANCE PROGRAM (revised 2/27/98) Program Overview The Senior Management Basic Life Insurance Program (SMBLIP) is an arrangement where the Company and you purchase a permanent life insurance policy on your life. SMBLIP replaces the Executive Basic Life Insurance Program (EBLIP). There are several advantages to this program including access to cash value prior to age 65 and a greater accumulation cash value at age 65. The Company will pay the entire annual premium for your SMBLIP coverage. Your W-2 will reflect an imputed income amount associated with the insurance coverage provided to you under the policy. In certain cases, e.g., your death before retirement, the total benefits will be shared between the Company and your designated beneficiary but the Company will share in the death benefit only to the extent that the total insurance amount exceeds one times your salary rounded to the next higher $1,000. This type of arrangement is known in the insurance industry as "Split Dollar." After attaining normal retirement age 65 (or 15 years of participation in the program, if later), the Company will recoup its premium payments from the cash value build-up and cease to have any interest in the policy. The remaining cash value will be sufficient to maintain your death benefit without further premium payments. Your death benefit will change to reflect any change in your salary. At retirement, your death benefit will become frozen at your final annual salary rounded to the next higher $1,000. During the period in which the Company makes premium payments, your imputed income will increase to reflect your increasing age, as well as any increase in death benefit. After premium payments cease, i.e., the later of your attaining age 65 or 15 years from the policy issue date, you will have no further imputed income. Although this arrangement is primarily designed to pay a benefit upon your death, there is also a cash value build-up. Once sufficient funds have accumulated and the Company no longer has an interest in the policy because it has recouped its premiums, you have the option to use some or all of the remaining cash in lieu of some or all of the death benefit. AT&T has selected two insurers, Metropolitan Life Insurance Company and Pacific Life Insurance Company, to provide the SMBLIP coverage. You will therefore have two policies on your life; one from each insurer, and each insurer will provide half the defined amount of death benefit. Secured Benefit Changes to the tax law over the years have required an increasing portion of the Senior Management benefit programs to be paid from Company operating income. SMBLIP allows the Company to contribute towards the cost of this program on a timely basis while securing the benefit payment from a third party (the insurance companies). Eligibility SMBLIP is provided to active AT&T Senior Managers. Employees who are promoted to or hired as Senior Managers are immediately eligible to enroll in this program. Coverage SMBLIP is provided as a replacement to the death benefit coverage provided under the Executive Basic Life Insurance Plan (EBLIP). The benefit is one times annual salary rounded to the next higher $1,000. The death benefit will be updated to reflect changes in your salary. There may be circumstances where a large increase in salary and, therefore, a corresponding increase in death benefit, will require providing medical information to the insurer. By providing this medical information, the insurer is able to keep the premium payments at the lowest level. A medical information waiver, signed by you, will be kept on file in the event this circumstance occurs. This will allow the Company to release to the insurer the required information from your Company medical records. Higher death benefit coverage associated with salary increases is guaranteed, no matter what your health circumstances may be at that time. Conversion Rights If you are a participant in the Executive Basic Life Insurance Plan at the time you become eligible for SMBLIP, for a limited period of time you have the right to convert your coverage under EBLIP to a separate individual policy provided by the insurance carrier. We suggest you discuss this with your financial advisor before exercising or declining this right. You may exercise this right by contacting Harris, Crouch, Long, Scott & Miller, Inc., the administrator for EBLIP, at 1-800-510-2050. Program Illustration You will be provided with a personal illustration based on your current salary. This illustration reflects your costs and benefits, as well as the Company's, over the life of the policy. It provides a picture of how the policy works and what your tax on imputed income might be, using an assumed salary growth. The actual ongoing life insurance amounts will be different from this illustration. Premium Period SMBLIP is designed for premiums to be extended over a period of time to ease the impact on cash flow to the Company. This period is normally from the time of your enrollment until the first policy anniversary after you reach age 65. However, in all cases, premiums must be paid for a minimum of 15 years. Therefore, if you enroll in the program after age 50, the Company will continue premium payments and you will continue to recognize income until the 15 year minimum is reached. Imputed Income SMBLIP offers a cost-effective life insurance program for Senior Managers. The cost to you of the SMBLIP will be the income tax payable on the amount of your imputed income. Cash Value This program is designed to provide you with a pre- and post retirement death benefit. However, in addition to the death benefit, there is a cash value build-up. That is, part of each premium is placed in an "investment fund" to earn income. Investment earnings beyond the amounts necessary to provide the death benefit coverage build on a tax advantaged basis in the policy. The policy's cash value is the basis for your subsequent "premium free" death benefit. Cash Availability Under SMBLIP you have considerable flexibility. After the Company interest has been satisfied, you may reduce your death benefit and utilize the policy cash value in a number of ways. For example: a) Loans The cash value attributed to you may be withdrawn in the form of a loan. There could be tax implications as well as death benefit diminution associated with a loan. b) Income Stream or Lump Sum It is possible to convert all or any portion of the policy from a death benefit to either an income "stream" (i.e., an annuity) or a lump sum cash payout. The extent to which you convert to income or cash will cancel or reduce the death benefit. Once you convert, it is not possible to re-establish the original death benefit. We suggest that you consult with your financial advisor before exercising these options. Insurability If you enroll within 60 days of becoming a Senior Manager you will be guaranteed to be insured. Your imputed income rate will not depend on your health or smoking status. It will differ from others depending only on age and amount of death benefit. Enrollment after 60 days may require a medical questionnaire or examination. Transfer/Assignment of Ownership After you enroll in the program, you may transfer ownership to another, e.g., an individual, trust, etc. Another option is for you to not take ownership, but rather another individual or trust, etc., may apply for ownership of the policy. It is of particular importance that if the original owner of the policy is not you, that the owner sign the applications as the "Applicant/Policyowner" and you sign as the "Proposed Insured". Since these transfers are generally construed to be irrevocable, we urge you to consult with an attorney and/or tax advisor before making this decision. Early Retirement or Termination If, at retirement, you are "Pension Eligible" or "Retirement Eligible" and you have not reached normal retirement age (65), the Company will continue to pay premiums until you reach age 65 or 15 years of participation in the program, if later. During this period you will continue to have imputed income based on your age and the amount of insurance in force. At the end of this period, i.e., the later of the policy anniversary immediately following your attainment of age 65 or the 15th policy anniversary, the premiums will cease and the aggregate Company premiums will be returned to the Company. For purposes of the SMBLIP, you will be considered "Pension Eligible" if you retire with a Disability Allowance or Minimum Retirement Benefit under the AT&T Senior Management Long Term Disability and Survivor Protection Plan. You will be considered "Retirement Eligible" for purposes of the SMBLIP if you retire after having satisfied one of the following minimum age and length of service (as determined under the AT&T Management Pension Plan) combinations: (a) any age and 30 years of service; (b) age 50 and 25 years of service; (c) age 55 and 20 years of service; or (d) age 65 and 10 years of service. If you separate from the Company without being Pension Eligible or Retirement Eligible, the aggregate amount of Company premiums paid up to that point will be immediately returned to the Company from the cash value of the policy. You can, at your option, either maintain the policy by paying the policy premiums, or you may use the remaining cash value (if any) to buy other "self-supporting" life insurance, or you may withdraw any remaining cash value and cancel the policy. Whether or not you are Pension Eligible or Retirement Eligible, if you leave the Company, and without the Company's consent or an appropriate waiver, establish a relationship with a competitor of the Company or engage in activity in conflict with or adverse to the interests of the Company under the standards of the AT&T Non-Competition Guideline and as determined by the AT&T Executive Vice President - - Human Resources, the process will be the same as with retirement/termination without being Pension Eligible or Retirement Eligible. Demotion If you are demoted to a position which is not a Senior Manager, the effect is the same as if terminated from the Company. You will however, automatically become re-eligible for coverage under the Executive Basic Life Insurance Plan (EBLIP). Contractual Agreement One of the unique aspects of this insurance policy is the existence of a contract between you and AT&T. This agreement has no relationship to employment or any other benefit but rather defines the responsibilities of both the Company and you in the operation of the policy. You, or another, will own the policy and determine the beneficiary. The Company will hold the policy and have a "Collateral Assignment" from the owner entitling AT&T, as long as it has a collateral interest in the policy, to any death benefit amounts in excess of one times your annual salary rounded to the next higher $1,000, and all cash values up to an amount equal to its cumulative premiums paid. This document is a legal agreement and as such includes a significant amount of detail and warrants careful review before signing. Although somewhat unique to life insurance, a collateral assignment is similar in context to an automobile loan where the car becomes "collateral" for the money lent to buy it. In this case, a portion of the cash value and death benefit of the policy is the collateral the Company receives for contributing premium payments to "buy" the life insurance policy. The agreement is satisfied when the aggregate premiums paid by the Company are returned. Some of the major sections of the agreement are: - Description of the policy - How the premiums are paid - How the proceeds are paid - How the agreement terminates - Claims procedure - Description of the assignment The Agreement is included with the enrollment documents and requires signature of the owner of your policy (i.e. you, another individual, trustee, etc.). Taxes Split Dollar life insurance policies have been in existence for decades. The IRS has issued several rulings over this period which treat these policies favorably from a tax perspective. However, the Company does not assure any particular tax treatment and recommends that you review your own situation with your personal attorney and/or tax advisor. Enrollment AT&T has selected Metropolitan Life Insurance Company and Pacific Life Insurance Company to provide the coverage. This is to provide the best combination of premium rates and Senior Manager protection. As such, there is some duplication of forms. Once enrollment has been completed, however, this two insurer approach should have a minimal impact on you. Enrollment, and any future changes to your policy (i.e., assignment of ownership, beneficiary change, etc.) is processed through AT&T Executive Human Resources. EX-10 8 EXHIBIT (10)(III)(A)(18) AT&T SENIOR OFFICER SEVERANCE PLAN PLAN DOCUMENT AND SUMMARY PLAN DESCRIPTION (Effective October 9, 1997) (As Amended October 30, 1997) THIS DOCUMENT, LIKE ALL COMPANY PLANS, PERSONNEL POLICIES OR PRACTICES, IS NOT A CONTRACT OF EMPLOYMENT. IT IS NOT INTENDED TO CREATE, AND IT SHOULD NOT BE CONSTRUED TO CREATE, ANY CONTRACTUAL RIGHTS, EITHER EXPRESS OR IMPLIED, BETWEEN THE COMPANY AND ITS EMPLOYEES. AT AT&T, THE EMPLOYMENT RELATIONSHIP WITH EMPLOYEES COVERED BY THIS PLAN IS "AT-WILL". THIS MEANS THAT EMPLOYEES HAVE THE RIGHT TO QUIT THEIR EMPLOYMENT AT ANY TIME AND FOR ANY REASON, AND THE COMPANY RESERVES THE RIGHT TO TERMINATE ANY EMPLOYEE'S EMPLOYMENT, WITH OR WITHOUT CAUSE, AT ANY TIME FOR ANY REASON. IN THE EVENT THERE IS A CONFLICT BETWEEN STATEMENTS IN THIS PLAN REGARDING BENEFITS PROVIDED BY ANOTHER PLAN AND THE TERMS OF THAT OTHER BENEFIT PLAN, POLICY, OR PRACTICE, THE APPLICABLE BENEFIT PLAN, POLICY OR PRACTICE PROVIDING THE BENEFITS IN QUESTION WILL CONTROL. AT&T RESERVES THE RIGHT, AT ANY TIME, TO MODIFY, SUSPEND, CHANGE, OR TERMINATE ITS EMPLOYEE BENEFIT PLANS OR SENIOR MANAGER INCENTIVE, BENEFIT AND/OR PERQUISITE PLANS, PROGRAMS, POLICIES OR PRACTICES. AT&T SENIOR OFFICER SEVERANCE PLAN PLAN DOCUMENT AND SUMMARY PLAN DESCRIPTION A. OVERVIEW The AT&T Senior Officer Severance Plan ("the Plan" or "this Plan"), effective October 9, 1997 ("Effective Date"), is designed to provide certain supplemental payments and benefit enhancements to eligible Senior Management employees (each, a "Participant" or collectively "Participants") of AT&T Corp. ("the Company" and/or "AT&T") whose employment is terminated under certain circumstances set forth in this Plan. Benefits under this Plan shall be in place of any other current or future plan, program, policy, or arrangement providing severance payments or post-retirement ancillary benefits, except as provided in Section N. The other benefits provided by this Plan, to the extent they differ from benefits provided by current AT&T benefit plans and programs, will be in addition to the benefits provided by the regular AT&T benefit plans and programs. See "About Your Benefits" for descriptions of those plans and programs. For purposes of this Plan, "Service Pension eligibility" or "Service Pension eligible" shall have the meaning set forth in the AT&T Management Pension Plan (AT&TMPP) prior to the amendments effective August 1, 1997. B. TYPE OF PLAN Under Section 3 (1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), this Plan is classified and is to be interpreted as an employee welfare benefit plan. C. PLAN PARTICIPATION Participants in this Plan are certain current members of the AT&T Senior Management Team, including all members of the AT&T Operations Team, as identified on Exhibit A. D. ELIGIBILITY TO RECEIVE BENEFITS 1. You will become entitled to receive the benefits described in Section F. in the event you cease to be a Company employee: a) by reason of Company-initiated termination for other than Cause (as defined in Section E. below); or b) by reason of your election to terminate your Company employment for Good Reason (in accordance with the Notification provisions set forth below); and c) you execute a valid Separation Agreement and Release ("Release"), and the time during which you may revoke the Release has expired. Any Participant who receives any payments or benefits under this Plan shall not be entitled to receive any severance payments or severance benefits under any other plan, program, policy, agreement or practice of the Company, except as provided in Section N; provided, however, that agreement to participate in this AT&T Senior Officer Severance Plan will not preclude future participation in any similar arrangement that provides a greater level of benefits. 2. Notification of Termination for Good Reason. In the event you determine that Good Reason exists for you to elect to terminate your employment with the Company, you must notify the Executive Vice President - Human Resources in writing of the specific event which you believe constitutes Good Reason within thirty (30) days of the occurrence of such event. Upon receipt of such notice, the Company shall have thirty (30) days in which to remedy the event specified in your notice as constituting Good Reason, as defined below. In the event the Company disagrees with your determination that the event specified in your notice constitutes Good Reason, you shall be so notified within ten (10) days of the Company's receipt of your written notice. In such event, or in the event you determine that the actions taken by the Company fail to adequately address your claimed event of Good Reason specified in your notice, the procedures set forth in Sections K. and L. of this Plan shall apply. E. DEFINITIONS For purposes of this Plan: a) "Cause" termination shall mean: (i) your conviction (including a plea of guilty or nolo contendere) of a crime involving theft, fraud, dishonesty or moral turpitude; (ii) violation by you of the Company's Code of Conduct or Non-Competition Guideline; (iii) gross omission or gross dereliction of any statutory, common law or other duty of loyalty to the Company or any of its affiliates; or (iv) repeated failure to carry out the duties of your position despite specific instruction to do so. b) "Good Reason" shall mean the occurrence without your express written consent of any of the following events: (i) Your demotion to a position which is not of a rank and responsibility comparable to members of the current Senior Management Team or those of a similar/replacing governance body; provided, however, that the Company's decision not to continue a Senior Management Team shall not be Good Reason, and provided, further, that (1) changes in reporting relationships shall not, alone, constitute Good Reason and/or (2) a reduction in your business unit's budget or a reduction your business unit's head count, by themselves, do not constitute Good Reason; or (ii) a reduction in your "Total Annual Compensation" (defined as the sum of your Annual Base Salary Rate, Target Annual Incentive and "Target Annual Long Term Incentive Grants") for any calendar or fiscal year, as applicable, to an amount that is less than the Total Annual Compensation that existed in the prior calendar or fiscal year, as applicable. For purposes of this Paragraph E.b)(ii) the dollar value of the "Target Annual Long Term Incentive Grants" shall exclude the value of any special one-time or periodic long-term incentive grants, and shall be determined by valuing Performance Shares, Stock Units, Restricted Stock, Restricted Stock Units, etc., at the market share price utilized in valuing the annual Senior Management compensation structures in the materials presented to the Compensation and Employee Benefits Committee of the Company's Board of Directors ("the Committee") when authorizing such grants, and assuming 100% performance achievement if such grants include performance criteria. Stock Options and Stock Appreciation Rights will be valued by the Black-Scholes methodology (and related share price) as utilized in the materials presented to the Committee when authorizing such grants. c) "Termination Date" shall mean the date the Participant ceases to be an employee of the Company. F. PLAN PAYMENTS AND BENEFITS As a Participant who becomes eligible to receive benefits under this Plan, you shall be entitled to the following: 1. Severance Payment A Severance Payment under this Section F.1. that will be the greater of 1) two hundred percent (200%) of the sum of your final annual base salary plus the target annual incentive in effect for you at your Termination Date, or 2) two hundred percent (200%) of the sum of your annual base salary plus the target annual incentive in effect for you at the Effective Date. 2. Deferral Option At your election prior to termination of employment you may defer receipt of all or a portion of the Severance Payment under Section F.1. for up to five (5) years from your Termination Date. Payout of the Severance Payment may be in the form of a lump sum or up to a maximum of five approximately equal annual installments. In the event of your death prior to either the commencement or completion of payout of the deferred amount, the unpaid balance shall be paid to your named beneficiary (or to your estate if no beneficiary has been named) in a lump sum within thirty (30) business days of such death. The interest rate on such deferred amounts will be the interest rate formula applicable under the AT&T Senior Management Incentive Award Deferral Plan for deferred cash amounts which otherwise would have been payable in the calendar year which includes the Effective Date. Your initial election to defer must be made within thirty (30) days after you first become eligible to participate in this Plan. Thereafter, you may change your election, provided, however, that any such change must be made prior to your Termination Date in the event of a Company-initiated termination for other than Cause, or at the time of or prior to your notification of termination for Good Reason. If you elect to defer, the obligation to pay the deferred amounts will be evidenced by the separate written agreement of AT&T to pay the amounts, together with interest on those amounts, determined pursuant to the terms of this Plan, which agreement will constitute the unsecured and unfunded obligation of AT&T. 3. Annual Incentive Your award program currently is comprised of two components: APA (AT&T Performance Award and MA (Merit Award). You will be eligible to receive a pro-rated portion of the annual incentive (APA and MA, or successor program) applicable to the year of your termination for your time on the active payroll during the performance year, in an amount equal to the amount produced by the actual achievement level for such year multiplied by a fraction, the numerator of which is the number of complete months you were employed during the calendar year (including the last month if your Termination Date is on or after the 15th of the month) and the denominator of which is 12. Such amount shall be payable during the first quarter of the following year, in accordance with existing practices and terms of the award program. 4. Outstanding Long Term Incentives You will be entitled to the following treatment with respect to your outstanding long term incentive grants: For Participants who are not Service Pension eligible, any outstanding AT&T Performance Shares/Stock Units will continue after your Termination Date in the same way that they would continue if you were Service Pension eligible; For Participants who are not Service Pension eligible, any unexercised AT&T Stock Options, excluding any Leveraged Stock Options, outstanding as of your Termination Date will continue in the same way they would continue if you had been Service Pension eligible; Any unvested Restricted Stock Units, Leveraged Stock Options or such other long-term incentives which are not automatically continued by virtue of Service Pension eligibility, and which are outstanding as of your Termination Date will continue as if you continued to be an active employee of the Company; and Any unvested Restricted Stock outstanding as of your Termination Date will vest as of your Termination Date. 5. Life Insurance/Death Benefit For Participants who are not Service Pension eligible, your AT&T Senior Management Basic Life Insurance and AT&T Senior Management Individual (split dollar) Life Insurance, will continue after your Termination Date in the same way they would continue if you had been Service Pension eligible on your Termination Date. Moreover, the one times pay (i.e. base salary plus annual incentive) Death Benefit currently provided to Service Pension eligible Senior Managers under the AT&TMPP (for base salary) and AT&T Non-Qualified Pension Plan (AT&TNQPP) (for annual incentive) will be paid to your qualified survivors provided that Service Pension eligible Senior Managers are eligible to receive this benefit as of your Termination Date. The definition of qualified survivor will be the same as provided for in the comparable Death Benefit provision of the AT&TMPP and AT&TNQPP provided, however, that the Death Benefit paid to non-Service Pension eligible Participants will be paid entirely out of the Company's operating income. Any Death Benefit paid under the AT&T Senior Management Long Term Disability and Survivor Protection Plan ("SMLTD&SPP") will reduce, by the amount of such SMLTD&SPP Death Benefit, any Death Benefit payable under this Section F.5. 6. Financial Counseling You will be entitled to financial counseling services in accordance with the Company's then current Senior Management Financial Counseling Program for two full years from your Termination Date, including income tax preparation during the subsequent calendar year with respect to income tax returns for the calendar year which includes the second anniversary of your Termination Date. 7. Outplacement Services You will be entitled to receive services of a Company paid outplacement consultant in accordance with the practice then current for Senior Management employees as of your Termination Date; provided, however, that an election to use such services must be made within one year subsequent to your Termination Date. 8. Telephone Reimbursement You will continue to be eligible for telephone reimbursement through the Senior Management Telephone Reimbursement Program under the same terms and conditions as Service Pension eligible Senior Managers as of your Termination Date. 9. Vacation As a Participant, you should make every reasonable effort, consistent with the needs of the business, to take all vacation, personal days, and floating holidays to which you are entitled before your Termination Date. If you are unable to do so, you will be paid for any unused vacation days for the calendar year in which your Termination Date occurs and any approved carry-over days. You will not receive pay in lieu of floating holidays and management personal days if these days are not taken prior to your Termination Date. 10. Medical/Dental/Vision Coverage If, at your Termination Date, you are not eligible for post-retirement medical/dental/vision coverage provided to Service Pension eligible employees (or replacement coverage) under the Company's plans, you may be entitled as of your Termination Date to continuing healthcare coverage under the Consolidated Omnibus Budget Reconciliation Act ("COBRA"). In such event, the Company will reimburse you for the cost of such COBRA coverage for up to eighteen (18) months, plus a tax gross-up amount to negate the effect of taxes resulting from such reimbursement. All coverage for you and your eligible dependents will be the same as the coverage provided as of your Termination Date, subject to the terms of the AT&T Medical Expense Plan for Management Employees. You should immediately notify the COBRA administrator if you become covered under another group health plan, at which time your COBRA coverage will cease. G. SEPARATION AGREEMENT AND RELEASE In order to receive benefits under this Plan, you must sign a Release (a copy of which is attached hereto as Exhibit "B") which, among other provisions, releases and discharges AT&T, its benefit committees, and all of its affiliates, subsidiaries, and their respective successors and assigns, and the respective shareholders, officers, directors, employees and members of all of the named entities from all claims, demands or causes of action of any kind whatsoever arising out of your employment and the termination of your employment. The Release must be signed on your Termination Date and returned to the Company's Executive Vice President-Human Resources, within seven days of your actual Termination Date. H. WITHHOLDINGS The amount of the Severance Payment paid pursuant to this Plan is subject to the withholding of federal, state and local taxes, FICA (Social Security taxes), and FUTA and SUTA (unemployment taxes) at the time of payment and will be reported on IRS form W-2. The Severance Payment will not be reduced for contributions to, or be recognized under, any AT&T employee or Senior Management benefit plan or program. I. FORFEITURE You will forfeit all or a portion of your benefits under this Plan (excluding $25,000.00 deemed as consideration for signing and not revoking the Release), under the following circumstances: Violation of AT&T Code of Conduct or AT&T Non-Competition Guideline Notwithstanding any other provision of this Plan, if it is determined by the Executive Vice President - Human Resources of AT&T, in consultation with the Company's most senior legal counsel, that you violated AT&T's Code of Conduct, and/or violated the AT&T Non-Competition Guideline, you will be required to repay to the Company all of the Severance Payment and an amount equal to the economic value of the other benefits provided to you under the Plan, except $25,000. In the event you have elected to defer receipt of your Severance Payment in accordance with the procedures set forth in Section F.2., you shall forfeit the right to receive any of the amounts set forth in the deferral agreement specified in such Section. J. PLAN TERM PLUS TERMS AND CONDITIONS OF HR PLANS AND PROGRAMS The Initial Term ("Initial Term") of the Plan will be three years from the Effective Date and the Plan may not be canceled during this Initial Term. Thereafter, the Plan will automatically continue unless the Company notifies each Participant in writing of its decision to cancel the Plan; provided, however, that such written notification will be sent no less than one year prior to the effective date of such cancellation. Notwithstanding the above, and except as otherwise specifically provided for in this Plan, your rights and benefits under any of the Company's employee or Senior Management compensation, incentive, benefit and/or perquisite plans and programs, including annual and long-term incentive plans, continue to be subject to the terms of those plans and programs as they may be modified or amended from time to time or terminated in accordance with the Company's reservation of rights to so modify, amend or terminate. In the event there is a conflict between the material in this Plan and the terms of the respective compensation, incentive, benefit and/or perquisite plan documents, the benefit plan documents will control and govern the operation of the plans. The Executive Vice President - Human Resources of AT&T (or any successor to that officer's responsibilities) with the concurrence of the Company's most senior legal counsel shall be authorized to make minor or administrative amendments to the Plan, as well as amendments required by applicable federal or state law (or authorized or made desirable by such statutes). K. PLAN ADMINISTRATION AT&T is the Plan Administrator and Named Fiduciary of the Plan. AT&T has delegated administrative authority and responsibility to the Chairman - Compensation and Employee Benefits Committee of the AT&T Board of Directors. AT&T, 295 North Maple Avenue, Basking Ridge, New Jersey, solely administers this Plan through the Chairman of such Committee or his delegate who makes determinations concerning when and to what positions or groups payments should be made and any other determinations regarding interpretation and administration of this Plan and shall have sole and complete discretionary authority to determine such matters. The Chairman of such Committee is also a Named Fiduciary who shall serve as the final review authority, under this Plan, and shall have sole and complete discretionary authority to determine conclusively for all parties and in accordance with the terms of the documents or instruments governing the plan, any and all questions arising from the administration of this Plan and interpretation of all Plan provisions, determination of all questions relating to participation of eligible employees and eligibility for benefits, determination of all relevant facts, the amount and type of benefits payable to any Participant, spouse, heirs or estate, and construction of all terms of this Plan. All determinations and decisions of the Named Fiduciary are conclusive and binding on all parties and not subject to further review. The Named Fiduciary under this Plan has delegated to the Executive Vice President - Human Resources of AT&T the authority to review all initial claims for payments and benefits under the terms of this Plan. The Chairman of the Committee shall afford a full and fair review of any denial of a claim by the Executive Vice President - Human Resources of AT&T for payments under the terms of this Plan. Any Named Fiduciary or any fiduciary designated by a Named Fiduciary may delegate any responsibilities hereunder. Moreover, in a circumstance which requires an administrator who is also a Participant to make judgment(s) about himself/herself, such administrator/Participant will be automatically recused and replaced by another administrator named by the Chairman of the Committee. How to Appeal a Plan Determination If you believe that the benefits of the Plan have been improperly denied or the Plan's provisions incorrectly applied to your situation, you may appeal the determination by forwarding a written request for a review to: Chairman of the Compensation and Employee Benefits Committee of the Board of Directors AT&T Corp. 295 North Maple Avenue Basking Ridge, NJ 07920 Your written appeal should state the reasons you feel your situation was improperly handled. Be sure to include your name, Social Security number, work location, and the specific provisions you believe were improperly handled in your case. You may submit issues and comments in writing. During the course of the review, you may be required to provide additional information. This information will be requested in writing. You will be notified of a final decision within sixty (60) days following the receipt of your claim or the date all information requested from you is furnished, whichever is later. Notification of the result of the review will be written in a manner calculated to be understood by you and will specify reasons for the decision. If there are special circumstances requiring delay, you will be notified of the final decision no later than 120 days after your appeal is received. Official Plan Name and Plan Number: AT&T Senior Officer Severance Plan, Plan #_________. Plan Sponsor and Administrator: AT&T Corp. 295 North Maple Avenue Basking Ridge, NJ Employer Identification Number: ________ Type of Plan: Welfare benefit plan. Type of Administration and Funding: The Severance Payment is provided through direct payments by the Company from operating assets. Agent for Legal Process: The Company hopes that any disagreement you have with the application of the provisions described in this material can be resolved without resorting to legal process. If you wish to begin legal proceedings, however, service of legal process may be made upon the plan administrator to the attention of the person listed in this Section K. above. Plan Document: This package serves as the plan document for the AT&T Senior Officer Severance Plan. Effective Date: The Effective Date of this Plan shall be October XX, 1997. Your rights under ERISA. The AT&T Senior Officer Severance Plan is an employee welfare benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA). You are entitled to certain rights and protection under ERISA. In addition to creating rights for Plan Participants, ERISA imposes duties upon the people who are responsible for the operation of the Plan. The people who operate the Plan, called "Fiduciaries" of the Plan, have a duty to do so prudently, in your interest and in the interest of all members and beneficiaries. No one, including the Company, may terminate your employment for the purpose of preventing you from receiving the benefits to which you are entitled, and no one, including the Company, a union, or any other person, may discriminate against you in any other way for that purpose or in order to keep you from exercising your rights under ERISA. If your benefit request is denied in whole or in part, you have the right to have the Plan Administrator review and reconsider your benefit request. Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request materials from the Plan and do not receive them within thirty (30) days you may file suit in federal court. In such a case, the court may require the Plan Administrator to provide the materials and pay you up to $100 a day until you receive the materials unless they were not sent or received because of reasons beyond the control of the Administrator. If you have a benefit request which is denied or ignored, in whole or in part, you may file suit in a state or federal court. If you are discriminated against for asserting your rights, you may seek assistance from the US Department of Labor, or you may file suit in a federal court. The court will decide who should pay court costs and legal fees. If you are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees, for example, if it finds your claim is frivolous. If you have any questions, you should contact the Director - Executive Human Resources. If you have any questions about this statement on or about your rights under ERISA, you should contact the nearest Area Office of the US Labor-Management Services Administration, Department of Labor. L. ARBITRATION Any dispute, controversy, or question arising under, out of, or relating to this Agreement or the breach thereof, remaining after a Participant has filed a claim with the Executive Vice President - Human Resources, and the denial of that claim has been reviewed by the Chairman of the Committee, in accordance with the procedures set forth in or adopted pursuant to the provisions of Section K. hereof, and been denied, shall be, at a Participant's election, referred for arbitration in the State of New Jersey to a neutral arbitrator selected by the Participant and the Company. The proceeding shall be governed by the Commercial Rules of the American Arbitration Association then in effect or such rules last in effect (in the event such Association is no longer in existence) and the decision of the arbitrator shall be governed by the rule of law, and in particular ERISA and its related rules and regulations and relevant case law. If the parties are unable to agree upon a neutral arbitrator within thirty (30) days after a Participant has given the Company written notice of the desire to submit the dispute, controversy or question for decision as aforesaid, then either party may apply to the American Arbitration Association for the appointment of a neutral arbitrator, or, if such Association is not then in existence or does not desire to act in the matter, either party may apply to the Presiding Judge of the Superior Court of any county in New Jersey for the appointment of a neutral arbitrator to hear the parties and settle the dispute, controversy or question, and such right to submit a dispute arising hereunder to arbitration and the decision of the neutral arbitrator shall be final, conclusive and binding on all interested persons and no action at law or in equity shall be instituted, or, if instituted, further prosecuted by either party other than to enforce the award of the neutral arbitrator. The Participant and the Company shall each bear all your and its own costs and attorney fees, except that the Company shall pay the costs of any arbitrator appointed hereunder as well as the copy of any official transcript of the proceeding. M. PLAN DOCUMENTS This document is both the Summary Plan Description and the official Plan document which regulates the operation of this Plan. N. MISCELLANEOUS Messers Zeglis, Somers and Nagel are covered by individual arrangements that may, in certain circumstances, duplicate the Severance Payment provided for in Section F.1. and/or certain of the post-retirement benefits provided for in Sections F.2-F.10. In the event that such individual agreement provisions are in effect as of the Termination Date of such individual, the Executive Vice President - Human Resources is specifically empowered to reduce or eliminate the duplicative benefits provided for under the Plan. In taking such action, the Executive Vice President - Human Resources will be guided by the principles that (1) Messers Zeglis, Somers and Nagel will be treated, for the Sections specified above, no more or no less favorably than are other Participants not covered by individual agreements and (2) individual agreement provisions (e.g., individual pension/deferral accounts) which are not duplicative of the Severance Payment provided for in Section F.1. and/or post-retirement benefits specified in Sections F.2.- F.10. will not be considered in determining elimination and/or reductions in Plan benefits. O. ASSIGNMENT OR ALIENATION No payments or benefits under this Plan or any right or interest in such payments or benefits shall be assignable or subject in any manner to anticipation, alienation, sale, transfer, assignment, claims of creditors, garnishment, pledge, execution, attachment or encumbrance of any kind, including, but not limited to, pursuant to any domestic relations order (within the meaning of Section 206(d)(3) of ERISA and Section 414(p)(1)(B) of the Internal Revenue Code) and any such attempted disposition shall be null and void. AT&T Senior Officer Severance Plan Participant List (for 1998 10K Filing) 3/6/98 F. Ianna G. J. McGovern J. C. Petrillo J. D. Zeglis EX-10 9 EXHIBIT (10)(III)(A)(19) October 30, 1997 Mr. Frank Ianna 425 Devonshire Drive Franklin Lakes, NJ 07417 Dear Frank: The purpose of this letter agreement (hereinafter "Agreement") is to detail and document a special individual non-qualified supplemental retirement arrangement we have developed for you. Under this Agreement, a deferred account (hereinafter "Deferred Account") will be established in your name. The maintenance, vesting, forfeiture and distribution of the Deferred Account shall be in accordance with the following terms and conditions. On November 1, 1997 (hereinafter the "Effective Date"), AT&T Corp. (hereafter "the Company") shall credit the Deferred Account with an initial balance of Eight Hundred and Twenty Eight Thousand Dollars ($828,000). The Company shall credit interest to the Deferred Account as of the end of each calendar quarter at a rate equal to one-quarter of the average 30 Year Treasury Bond Rate in effect for the last previous quarter. The Deferred Account will be maintained as a bookkeeping account on the records of the Company and you will have no present ownership right or interest in the Deferred Account, nor in any assets of the Company with respect thereto. The Deferred Account may not be assigned, pledged or otherwise alienated by you and any attempt to do so, or any garnishment, execution or levy of any kind with respect to the Deferred Account, will not be recognized. You shall not have any right to receive any payment with respect to the Deferred Account, except as expressly provided below. In the event you cease to be a Company employee prior to the sixth anniversary of the Effective Date: (a) by reason of death or Long-Term Disability (as defined below), all amounts credited to the Deferred Account through the date of such termination, shall be paid to you [or, upon your death to your beneficiary, as designated on a form filed with Executive Human Resources, or to your estate if no beneficiary has been designated, (hereinafter your Survivors)] within the calendar quarter immediately following the quarter which includes the date of your termination of Company employment; (b) by reason of Company-initiated termination for other than Cause (as defined below), all amounts credited to the Deferred Account through the sixth anniversary of the Effective Date shall be paid to you (or to your Survivors) within the calendar quarter immediately following the quarter which includes such sixth anniversary; (c) by reason of your election to terminate your Company employment for Good Reason (as defined below), all amounts credited to the Deferred Account through the sixth anniversary of the Effective Date shall be paid to you (or to your Survivors) within the calendar quarter immediately following the quarter which includes such sixth anniversary; and (d) for any reason other than death, "Long Term Disability," Company-initiated termination for other than "Cause," or your election to terminate your employment for "Good Reason," then all amounts in the Deferred Account shall be canceled and you shall not receive any distribution with respect to the Deferred Account or have any further interest in the Deferred Account. In the event you cease to be a Company employee on or after the sixth anniversary of the Effective Date for any reason other than your death, all amounts credited to the Deferred Account will be paid to you in ____ (1 to 10) _____ (initials) approximately equal annual installments commencing within the first calendar quarter of the calendar year following the year in which your termination of employment occurs. Unpaid Deferred Account balances after termination continue to be credited with interest. In the event of your death prior to either commencement or completion of Deferred Account payment(s) to you, the unpaid balance of the Deferred Account as of your death shall be paid to your Survivors in a lump sum within the calendar quarter immediately following the quarter which includes the date of your death. For purposes of this Agreement: (a) "Long Term Disability" shall mean termination of your employment with the Company with eligibility to receive a disability allowance under the AT&T Senior Management Long Term Disability and Survivor Protection Plan or a replacement plan; (b) "Cause" shall mean: (i) your breach of any of the terms of this Agreement; (ii) your conviction (including a plea of guilty or nolo contendere) of a crime involving theft, fraud, dishonesty or moral turpitude; (iii) gross omission or gross dereliction of any statutory, common law or other duty of loyalty to the Company or any of its affiliates; (iv) violation by you of the Company's Code of Conduct or Non-Competition Guideline; or (v) repeated failure to carry out the duties of your position despite specific instruction to do so. (c) "Good Reason" shall mean the occurrence without your express written consent of any of the following events: (i) Your demotion to a position which is not of a rank and responsibility comparable to members of the current Senior Management Team or those of a similar/replacing governance body; provided, however, that the Company's decision not to continue a Senior Management Team shall not be Good Reason, and provided, further, that (1) changes in reporting relationships shall not, alone, constitute Good Reason and/or (2) a reduction in your business unit's budget or a reduction in your business unit's head count, by themselves, do not constitute Good Reason; or (ii) a reduction in your "Total Annual Compensation" (defined as the sum of your Annual Base Salary Rate, Target Annual Incentive and "Target Annual Long Term Incentive Grants") for any calendar or fiscal year, as applicable, to an amount that is less than the Total Annual Compensation that existed in the prior calendar or fiscal year, as applicable. For purposes of this paragraph (c)(ii) the dollar value of the "Target Annual Long Term Incentive Grants" shall exclude the value of any special one-time or periodic long-term incentive grants, and shall be determined by valuing Performance Shares, Stock Units, Restricted Stock, Restricted Stock Units, etc., at the market share price utilized in valuing the annual Senior Management compensation structures in the materials presented to the Compensation and Employee Benefits Committee of the Company's Board of Directors when authorizing such grants, and assuming 100% performance achievement if such grants include performance criteria. Stock Options and Stock Appreciation Rights will be valued by the Black Scholes methodology (and related share price) as utilized in the materials presented to such Compensation and Employee Benefits Committee when authorizing such grants. It is understood and agreed that you will not talk about, write about or otherwise publicize the terms or existence of this Agreement or any fact concerning its execution or implementation. You may, however, discuss its contents with your spouse, legal and/or financial counselor. IN ADDITION, DEFERRED ACCOUNT AMOUNTS PROVIDED UNDER THIS AGREEMENT ARE SUBJECT TO FORFEITURE (OR REPAYMENT IF SUCH AMOUNTS ALREADY HAVE BEEN PAID) IF YOU VIOLATE THE AT&T NON-COMPETITION GUIDELINE IN EFFECT AT THE TIME OF THE VIOLATION ANYTIME PRIOR TO THE THIRD ANNIVERSARY OF YOUR TERMINATION OF COMPANY EMPLOYMENT. (THE CURRENT GUIDELINE SUMMARY IS ATTACHED.) THIS AGREEMENT IS NOT AN EMPLOYMENT CONTRACT AND SHOULD NOT BE CONSTRUED OR INTERPRETED AS CONTAINING ANY GUARANTEE OF CONTINUED EMPLOYMENT. THE EMPLOYMENT RELATIONSHIP WITH THE COMPANY IS BY MUTUAL CONSENT ("EMPLOYMENT-AT-WILL"). THIS MEANS THAT EMPLOYEES HAVE THE RIGHT TO TERMINATE THEIR EMPLOYMENT AT ANY TIME AND FOR ANY REASON. LIKEWISE, THE COMPANY RESERVES THE RIGHT TO DISCONTINUE YOUR EMPLOYMENT WITH OR WITHOUT CAUSE AT ANY TIME AND FOR ANY REASON. Payments from the Deferred Account are in addition to and not in lieu of any qualified or non-qualified pension, savings, or other retirement plan, program or arrangement covering you, nor are such payments in lieu of any payments or other benefits which may be provided to you under the AT&T Senior Officer Severance Plan. The Deferred Account payments provided under this Agreement are subject to payroll tax withholding and reporting, and amounts credited to the Deferred Account are not included in the base for calculating benefits under any employee or Senior Management benefit plan, program or practice. Any dispute, controversy, or question arising under, out of, or relating to this Agreement or the breach thereof, shall be referred for arbitration in the State of New Jersey to a neutral arbitrator selected by you and the Company. The proceeding shall be governed by the Commercial Rules of the American Arbitration Association then in effect or such rules last in effect (in the event such Association is no longer in existence) and the decision of the arbitrator shall be governed by the rule of law. If the parties are unable to agree upon a neutral arbitrator within thirty (30) days after each party has given the other written notice of the desire to submit the dispute, controversy or question for decision as aforesaid, then either party may apply to the American Arbitration Association for the appointment of a neutral arbitrator, or, if such Association is not then in existence or does not desire to act in the matter, either party may apply to the Presiding Judge of the Superior Court of any county in New Jersey for the appointment of a neutral arbitrator to hear the parties and settle the dispute, controversy or question, and such right to submit a dispute arising hereunder to arbitration and the decision of the neutral arbitrator shall be final, conclusive and binding on all interested persons and no action at law or in equity shall be instituted, or, if instituted, further prosecuted by either party other than to enforce the award of the neutral arbitrator. You and the Company shall each bear all your and its own costs and attorney fees, except that the Company shall pay the costs of any arbitrator appointed hereunder as well as the copy of any official transcript of the proceeding. The construction, interpretation and performance of this Agreement shall be governed by the laws of the State of New Jersey, without regard to its conflict of laws rule. Frank, I am happy to present this special arrangement to you. It recognizes the extraordinary contribution you have made to our business. If you agree with the terms and conditions detailed above, please enter your payout election and initial in the spaces provided on page 2, sign and date this Agreement in the spaces provided below and, prior to November 14, 1997, return the original executed copy to me. Sincerely, Attachment ______________________________ ___________________________________ Acknowledged and Agreed to Date Frank Ianna EX-10 10 EXHIBIT (10)(III)(A)(20) October 30, 1997 Ms. Gail J. McGovern 28 Mt. Pleasant Rd. Morristown, NJ 07960 Dear Gail: The purpose of this letter agreement (hereinafter "Agreement") is to detail and document a special individual non-qualified supplemental retirement arrangement we have developed for you. Under this Agreement, a deferred account (hereinafter "Deferred Account") will be established in your name. The maintenance, vesting, forfeiture and distribution of the Deferred Account shall be in accordance with the following terms and conditions. On November 1, 1997 (hereinafter the "Effective Date"), AT&T Corp. (hereafter "the Company") shall credit the Deferred Account with an initial balance of Eight Hundred and Twenty Thousand Dollars ($820,000). The Company shall credit interest to the Deferred Account as of the end of each calendar quarter at a rate equal to one-quarter of the average 30 Year Treasury Bond Rate in effect for the last previous quarter. The Deferred Account will be maintained as a bookkeeping account on the records of the Company and you will have no present ownership right or interest in the Deferred Account, nor in any assets of the Company with respect thereto. The Deferred Account may not be assigned, pledged or otherwise alienated by you and any attempt to do so, or any garnishment, execution or levy of any kind with respect to the Deferred Account, will not be recognized. You shall not have any right to receive any payment with respect to the Deferred Account, except as expressly provided below. In the event you cease to be a Company employee prior to the seventh anniversary of the Effective Date: (a) by reason of death or Long-Term Disability (as defined below), all amounts credited to the Deferred Account through the date of such termination, shall be paid to you [or, upon your death to your beneficiary, as designated on a form filed with Executive Human Resources, or to your estate if no beneficiary has been designated, (hereinafter your Survivors)] within the calendar quarter immediately following the quarter which includes the date of your termination of Company employment; (b) by reason of Company-initiated termination for other than Cause (as defined below), all amounts credited to the Deferred Account through the seventh anniversary of the Effective Date shall be paid to you (or to your Survivors) within the calendar quarter immediately following the quarter which includes such seventh anniversary; (c) by reason of your election to terminate your Company employment for Good Reason (as defined below), all amounts credited to the Deferred Account through the seventh anniversary of the Effective Date shall be paid to you (or to your Survivors) within the calendar quarter immediately following the quarter which includes such seventh anniversary; and (d) for any reason other than death, "Long Term Disability, "Company-initiated termination for other than "Cause,"or your election to terminate your employment for "Good Reason," then all amounts in the Deferred Account shall be canceled and you shall not receive any distribution with respect to the Deferred Account or have any further interest in the Deferred Account. In the event you cease to be a Company employee on or after the seventh anniversary of the Effective Date for any reason other than your death, all amounts credited to the Deferred Account will be paid to you in ____ (1 to 10) _____ (initials) approximately equal annual installments commencing within the first calendar quarter of the calendar year following the year in which your termination of employment occurs. Unpaid Deferred Account balances after termination continue to be credited with interest. In the event of your death prior to either commencement or completion of Deferred Account payment(s) to you, the unpaid balance of the Deferred Account as of your death shall be paid to your Survivors in a lump sum within the calendar quarter immediately following the quarter which includes the date of your death. For purposes of this Agreement: (a) "Long Term Disability" shall mean termination of your employment with the Company with eligibility to receive a disability allowance under the AT&T Senior Management Long Term Disability and Survivor Protection Plan or a replacement plan; (b) "Cause" shall mean: (i) your breach of any of the terms of this Agreement; (ii) your conviction (including a plea of guilty or nolo contendere) of a crime involving theft, fraud, dishonesty or moral turpitude; (iii) gross omission or gross dereliction of any statutory, common law or other duty of loyalty to the Company or any of its affiliates; (iv) violation by you of the Company's Code of Conduct or Non-Competition Guideline; or (v) repeated failure to carry out the duties of your position despite specific instruction to do so. (c) "Good Reason" shall mean the occurrence without your express written consent of any of the following events: (i) Your demotion to a position which is not of a rank and responsibility comparable to members of the current Senior Management Team or those of a similar/replacing governance body; provided, however, that the Company's decision not to continue a Senior Management Team shall not be Good Reason, and provided, further, that (1) changes in reporting relationships shall not, alone, constitute Good Reason and/or (2) a reduction in your business unit's budget or a reduction in your business unit's head count, by themselves, do not constitute Good Reason; or (ii) a reduction in your "Total Annual Compensation" (defined as the sum of your Annual Base Salary Rate, Target Annual Incentive and "Target Annual Long Term Incentive Grants") for any calendar or fiscal year, as applicable, to an amount that is less than the Total Annual Compensation that existed in the prior calendar or fiscal year, as applicable. For purposes of this paragraph (c)(ii) the dollar value of the "Target Annual Long Term Incentive Grants" shall exclude the value of any special one-time or periodic long-term incentive grants, and shall be determined by valuing Performance Shares, Stock Units, Restricted Stock, Restricted Stock Units, etc., at the market share price utilized in valuing the annual Senior Management compensation structures in the materials presented to the Compensation and Employee Benefits Committee of the Company's Board of Directors when authorizing such grants, and assuming 100% performance achievement if such grants include performance criteria. Stock Options and Stock Appreciation Rights will be valued by the Black Scholes methodology (and related share price) as utilized in the materials presented to such Compensation and Employee Benefits Committee when authorizing such grants. It is understood and agreed that you will not talk about, write about or otherwise publicize the terms or existence of this Agreement or any fact concerning its execution or implementation. You may, however, discuss its contents with your spouse, legal and/or financial counselor. IN ADDITION, DEFERRED ACCOUNT AMOUNTS PROVIDED UNDER THIS AGREEMENT ARE SUBJECT TO FORFEITURE (OR REPAYMENT IF SUCH AMOUNTS ALREADY HAVE BEEN PAID) IF YOU VIOLATE THE AT&T NON-COMPETITION GUIDELINE IN EFFECT AT THE TIME OF THE VIOLATION ANYTIME PRIOR TO THE THIRD ANNIVERSARY OF YOUR TERMINATION OF COMPANY EMPLOYMENT. (THE CURRENT GUIDELINE SUMMARY IS ATTACHED.) THIS AGREEMENT IS NOT AN EMPLOYMENT CONTRACT AND SHOULD NOT BE CONSTRUED OR INTERPRETED AS CONTAINING ANY GUARANTEE OF CONTINUED EMPLOYMENT. THE EMPLOYMENT RELATIONSHIP WITH THE COMPANY IS BY MUTUAL CONSENT ("EMPLOYMENT-AT-WILL"). THIS MEANS THAT EMPLOYEES HAVE THE RIGHT TO TERMINATE THEIR EMPLOYMENT AT ANY TIME AND FOR ANY REASON. LIKEWISE, THE COMPANY RESERVES THE RIGHT TO DISCONTINUE YOUR EMPLOYMENT WITH OR WITHOUT CAUSE AT ANY TIME AND FOR ANY REASON. Payments from the Deferred Account are in addition to and not in lieu of any qualified or non-qualified pension, savings, or other retirement plan, program or arrangement covering you, nor are such payments in lieu of any payments or other benefits which may be provided to you under the AT&T Senior Officer Severance Plan. The Deferred Account payments provided under this Agreement are subject to payroll tax withholding and reporting, and amounts credited to the Deferred Account are not included in the base for calculating benefits under any employee or Senior Management benefit plan, program or practice. Any dispute, controversy, or question arising under, out of, or relating to this Agreement or the breach thereof, shall be referred for arbitration in the State of New Jersey to a neutral arbitrator selected by you and the Company. The proceeding shall be governed by the Commercial Rules of the American Arbitration Association then in effect or such rules last in effect (in the event such Association is no longer in existence) and the decision of the arbitrator shall be governed by the rule of law. If the parties are unable to agree upon a neutral arbitrator within thirty (30) days after each party has given the other written notice of the desire to submit the dispute, controversy or question for decision as aforesaid, then either party may apply to the American Arbitration Association for the appointment of a neutral arbitrator, or, if such Association is not then in existence or does not desire to act in the matter, either party may apply to the Presiding Judge of the Superior Court of any county in New Jersey for the appointment of a neutral arbitrator to hear the parties and settle the dispute, controversy or question, and such right to submit a dispute arising hereunder to arbitration and the decision of the neutral arbitrator shall be final, conclusive and binding on all interested persons and no action at law or in equity shall be instituted, or, if instituted, further prosecuted by either party other than to enforce the award of the neutral arbitrator. You and the Company shall each bear all your and its own costs and attorney fees, except that the Company shall pay the costs of any arbitrator appointed hereunder as well as the copy of any official transcript of the proceeding. The construction, interpretation and performance of this Agreement shall be governed by the laws of the State of New Jersey, without regard to its conflict of laws rule. Gail, I am happy to present this special arrangement to you. It recognizes the extraordinary contribution you have made to our business. If you agree with the terms and conditions detailed above, please enter your payout election and initial in the spaces provided on page 2, sign and date this Agreement in the spaces provided below and, prior to November 14, 1997, return the original executed copy to me. Sincerely, Attachment - ---------------------------------- ------------------------------- Acknowledged and Agreed to Date Gail J. McGovern EX-10 11 EXHIBIT (10)(III)(A)(21) October 30, 1997 Mr. John C. Petrillo 295 No. Maple Ave., Rm 5204A2 Basking Ridge, NJ 07920 Dear John: The purpose of this letter agreement (hereinafter "Agreement") is to detail and document a special individual non-qualified supplemental retirement arrangement we have developed for you. Under this Agreement, a deferred account (hereinafter "Deferred Account") will be established in your name. The maintenance, vesting, forfeiture and distribution of the Deferred Account shall be in accordance with the following terms and conditions. On November 1, 1997 (hereinafter the "Effective Date"), AT&T Corp. (hereafter "the Company") shall credit the Deferred Account with an initial balance of Eight Hundred and Seventy Thousand Dollars ($870,000). The Company shall credit interest to the Deferred Account as of the end of each calendar quarter at a rate equal to one-quarter of the average 30 Year Treasury Bond Rate in effect for the last previous quarter. The Deferred Account will be maintained as a bookkeeping account on the records of the Company and you will have no present ownership right or interest in the Deferred Account, nor in any assets of the Company with respect thereto. The Deferred Account may not be assigned, pledged or otherwise alienated by you and any attempt to do so, or any garnishment, execution or levy of any kind with respect to the Deferred Account, will not be recognized. You shall not have any right to receive any payment with respect to the Deferred Account, except as expressly provided below. In the event you cease to be a Company employee prior to the sixth anniversary of the Effective Date: (a) by reason of death or Long-Term Disability (as defined below), all amounts credited to the Deferred Account through the date of such termination, shall be paid to you [or, upon your death to your beneficiary, as designated on a form filed with Executive Human Resources, or to your estate if no beneficiary has been designated, (hereinafter your Survivors)] within the calendar quarter immediately following the quarter which includes the date of your termination of Company employment; (b) by reason of Company-initiated termination for other than Cause (as defined below), all amounts credited to the Deferred Account through the sixth anniversary of the Effective Date shall be paid to you (or to your Survivors) within the calendar quarter immediately following the quarter which includes such sixth anniversary; (c) by reason of your election to terminate your Company employment for Good Reason (as defined below), all amounts credited to the Deferred Account through the sixth anniversary of the Effective Date shall be paid to you (or to your Survivors) within the calendar quarter immediately following the quarter which includes such sixth anniversary; and (d) for any reason other than death, "Long Term Disability," Company-initiated termination for other than "Cause," or your election to terminate your employment for "Good Reason," then all amounts in the Deferred Account shall be canceled and you shall not receive any distribution with respect to the Deferred Account or have any further interest in the Deferred Account. In the event you cease to be a Company employee on or after the sixth anniversary of the Effective Date for any reason other than your death, all amounts credited to the Deferred Account will be paid to you in ____ (1 to 10) _____ (initials) approximately equal annual installments commencing within the first calendar quarter of the calendar year following the year in which your termination of employment occurs. Unpaid Deferred Account balances after termination continue to be credited with interest. In the event of your death prior to either commencement or completion of Deferred Account payment(s) to you, the unpaid balance of the Deferred Account as of your death shall be paid to your Survivors in a lump sum within the calendar quarter immediately following the quarter which includes the date of your death. For purposes of this Agreement: (a) "Long Term Disability" shall mean termination of your employment with the Company with eligibility to receive a disability allowance under the AT&T Senior Management Long Term Disability and Survivor Protection Plan or a replacement plan; (b) "Cause" shall mean: (i) your breach of any of the terms of this Agreement; (ii) your conviction (including a plea of guilty or nolo contendere) of a crime involving theft, fraud, dishonesty or moral turpitude; (iii) gross omission or gross dereliction of any statutory, common law or other duty of loyalty to the Company or any of its affiliates; (iv) violation by you of the Company's Code of Conduct or Non-Competition Guideline; or (v) repeated failure to carry out the duties of your position despite specific instruction to do so. (c) "Good Reason" shall mean the occurrence without your express written consent of any of the following events: (i) Your demotion to a position which is not of a rank and responsibility comparable to members of the current Senior Management Team or those of a similar/replacing governance body; provided, however, that the Company's decision not to continue a Senior Management Team shall not be Good Reason, and provided, further, that (1) changes in reporting relationships shall not, alone, constitute Good Reason and/or (2) a reduction in your business unit's budget or a reduction in your business unit's head count, by themselves, do not constitute Good Reason; or (ii) a reduction in your "Total Annual Compensation" (defined as the sum of your Annual Base Salary Rate, Target Annual Incentive and "Target Annual Long Term Incentive Grants") for any calendar or fiscal year, as applicable, to an amount that is less than the Total Annual Compensation that existed in the prior calendar or fiscal year, as applicable. For purposes of this paragraph (c)(ii) the dollar value of the "Target Annual Long Term Incentive Grants" shall exclude the value of any special one-time or periodic long-term incentive grants, and shall be determined by valuing Performance Shares, Stock Units, Restricted Stock, Restricted Stock Units, etc., at the market share price utilized in valuing the annual Senior Management compensation structures in the materials presented to the Compensation and Employee Benefits Committee of the Company's Board of Directors when authorizing such grants, and assuming 100% performance achievement if such grants include performance criteria. Stock Options and Stock Appreciation Rights will be valued by the Black Scholes methodology (and related share price) as utilized in the materials presented to such Compensation and Employee Benefits Committee when authorizing such grants. It is understood and agreed that you will not talk about, write about or otherwise publicize the terms or existence of this Agreement or any fact concerning its execution or implementation. You may, however, discuss its contents with your spouse, legal and/or financial counselor. IN ADDITION, DEFERRED ACCOUNT AMOUNTS PROVIDED UNDER THIS AGREEMENT ARE SUBJECT TO FORFEITURE (OR REPAYMENT IF SUCH AMOUNTS ALREADY HAVE BEEN PAID) IF YOU VIOLATE THE AT&T NON-COMPETITION GUIDELINE IN EFFECT AT THE TIME OF THE VIOLATION ANYTIME PRIOR TO THE THIRD ANNIVERSARY OF YOUR TERMINATION OF COMPANY EMPLOYMENT. (THE CURRENT GUIDELINE SUMMARY IS ATTACHED.) THIS AGREEMENT IS NOT AN EMPLOYMENT CONTRACT AND SHOULD NOT BE CONSTRUED OR INTERPRETED AS CONTAINING ANY GUARANTEE OF CONTINUED EMPLOYMENT. THE EMPLOYMENT RELATIONSHIP WITH THE COMPANY IS BY MUTUAL CONSENT ("EMPLOYMENT-AT-WILL"). THIS MEANS THAT EMPLOYEES HAVE THE RIGHT TO TERMINATE THEIR EMPLOYMENT AT ANY TIME AND FOR ANY REASON. LIKEWISE, THE COMPANY RESERVES THE RIGHT TO DISCONTINUE YOUR EMPLOYMENT WITH OR WITHOUT CAUSE AT ANY TIME AND FOR ANY REASON. Payments from the Deferred Account are in addition to and not in lieu of any qualified or non-qualified pension, savings, or other retirement plan, program or arrangement covering you, nor are such payments in lieu of any payments or other benefits which may be provided to you under the AT&T Senior Officer Severance Plan. The Deferred Account payments provided under this Agreement are subject to payroll tax withholding and reporting, and amounts credited to the Deferred Account are not included in the base for calculating benefits under any employee or Senior Management benefit plan, program or practice. Any dispute, controversy, or question arising under, out of, or relating to this Agreement or the breach thereof, shall be referred for arbitration in the State of New Jersey to a neutral arbitrator selected by you and the Company. The proceeding shall be governed by the Commercial Rules of the American Arbitration Association then in effect or such rules last in effect (in the event such Association is no longer in existence) and the decision of the arbitrator shall be governed by the rule of law. If the parties are unable to agree upon a neutral arbitrator within thirty (30) days after each party has given the other written notice of the desire to submit the dispute, controversy or question for decision as aforesaid, then either party may apply to the American Arbitration Association for the appointment of a neutral arbitrator, or, if such Association is not then in existence or does not desire to act in the matter, either party may apply to the Presiding Judge of the Superior Court of any county in New Jersey for the appointment of a neutral arbitrator to hear the parties and settle the dispute, controversy or question, and such right to submit a dispute arising hereunder to arbitration and the decision of the neutral arbitrator shall be final, conclusive and binding on all interested persons and no action at law or in equity shall be instituted, or, if instituted, further prosecuted by either party other than to enforce the award of the neutral arbitrator. You and the Company shall each bear all your and its own costs and attorney fees, except that the Company shall pay the costs of any arbitrator appointed hereunder as well as the copy of any official transcript of the proceeding. The construction, interpretation and performance of this Agreement shall be governed by the laws of the State of New Jersey, without regard to its conflict of laws rule. John, I am happy to present this special arrangement to you. It recognizes the extraordinary contribution you have made to our business. If you agree with the terms and conditions detailed above, please enter your payout election and initial in the spaces provided on page 2, sign and date this Agreement in the spaces provided below and, prior to November 14, 1997, return the original executed copy to me. Sincerely, Attachment ______________________________ ______________________________ Acknowledged and Agreed to Date John C. Petrillo EX-10 12 EXHIBIT (10)(III)(A)(22) May 7, 1997 Mr. John D. Zeglis 1 Colonial Way Madison, NJ 07940 Dear John: This letter agreement (hereinafter Agreement) will establish an individual non-qualified pension arrangement (hereinafter Individual Pension) which, subject to the terms and conditions below, will provide you with a pension payable upon your termination/retirement from the Company, in the same form as applicable to the AT&T Non-Qualified Pension Plan. As part of the Individual Pension, survivor benefits may be provided to your spouse upon your death. Moreover, subject to the terms and conditions below, related post-retirement/termination benefits (hereinafter Post-Retirement Benefits) will be provided to you (hereinafter the Individual Pension and Post-Retirement Benefits are collectively referred to as the Special Benefits). If you terminate your Company employment prior to your age 52, the Special Benefits provisions of this Agreement will be null and void in their entirety, provided, however, such provisions will continue to apply in the event of a termination for (i) "Disability" (as defined) or (ii) a Company initiated termination for other than "Cause" (as defined), or you terminate your Company employment for "Good Reason" (as defined) both (i) and (ii) terminations hereinafter referred to as a "Termination". Individual Pension: The Individual Pension formula assumes you commenced Company employment on January 1, 1973 and utilizes the pension/retirement benefit formulas in the AT&T Management Pension Plan (AT&TMPP) and the AT&T Non-Qualified Pension Plan (AT&TNQPP), and plan amendments implemented in 1997 and thereafter provided, however, that in no event will the Individual Pension benefits be less than those Minimum Pension Schedule detailed in Appendix A: In addition, the Individual Pension will also provide for an Automatic Survivor Annuity. In the event of your death as an active employee, your spouse will receive 50% of your accrued Individual Pension benefit which you would have received in the event a Termination had occurred on your date of death. (Assuming the annuitant's pension was not declined.) In the event you do not decline the post-departure/Termination annuitant's pension, then under this Individual Pension your spouse will receive, after your death, an annuitant's pension for her lifetime. Under this provision, the benefit payable to you during your lifetime will be reduced for early retirement, if applicable (i.e., for pre-age 55 retirement), and reduced by the cost of the annuitant's pension (such annuitant's pension cost determined in accordance with the terms and conditions of the AT&TMPP and AT&TNQP at the time of your departure or Termination). The annuitant's pension will be a percentage of your lifetime benefit, such percentage determined in accordance with the terms and conditions of the AT&TMPP and AT&TNQPP at the time of your departure/Termination. Moreover, in the event the value of the survivor benefits under the AT&TMPP and AT&TNQPP, as amended in 1997, exceeds the value of the Automatic Survivor Annuity or elected Survivor Annuity as described in the two prior paragraphs, such higher amounts will be payable to your survivor. All AT&T qualified (e.g., AT&TMPP) and non-qualified (e.g., AT&TNQPP and AT&T Mid Career Pension Plan) pension/retirement plan benefits (except the AT&T Long Term Savings Plan and AT&T Incentive Award Deferral Plan) are offsets to (i.e., subtracted from) the amount of the Individual Pension (payable to you and/or your surviving spouse). It is further understood and agreed that any payment under the Individual Pension made as a result of a Disability will be an offset (subtracted from) the Disability Allowance payable under the AT&T SMLTD&SP or successor plan. Post-Retirement Benefits: If upon your termination of Company employment, you are eligible to receive an Individual Pension, you shall also be eligible, except as indicated in the following sentence, for such Post-Retirement Benefits as are then available (i.e., at your departure/Termination date) to Service Pension eligible Senior Managers. Any post-retirement benefit available to Service Pension eligible Senior Mangers which the Company is legally precluded from extending to non-Service Pensioners will not be part of your Post -Retirement Benefit package. Other Provisions: "Cause" shall be defined as follows: (1) conviction (including a plea of guilty or nolo contendere) of a felony or any crime or theft, dishonesty or moral turpitude; or (2) gross omission or gross dereliction of any statutory or common law duty of loyalty to the Company or (3) violation of AT&T's Code of Conduct. "Disability" shall be defined as being disabled after the first fifty-two week period following the onset of a physical or mental impairment as detailed in the AT&T Senior Management Long Term Disability and Survivor Protection Plan (AT&T SMLTD&SP). "Good Reason" shall be defined as any termination of your Company employment, initiated by you prior to reaching your 52nd birthday, resulting from any of the following events which are not cured by the Company within 20 days of your giving the Company written notice thereof: a) A reduction in annual total compensation (i.e., annual base salary rate, target annual incentive, "Long Term Incentive" as valued below) to less than $2,267,000. For purposes of the prior sentence, the dollar value of your annual "Long Term Incentive" grants shall be determined by valuing Performance Shares, Performance Units, Stock Units, Restricted Stock, Restricted Stock Units, etc., at the market price when the Compensation Committee approves such grants, and assuming 100% performance achievement if such grants include performance criteria, and Stock Options and SARs will be valued at 30% of the market price of the shares or related shares when the Compensation Committee approves such grants, as applicable. b) The assignment to you, without your expressed written consent, of any duties inconsistent with, or, any substantial alteration in, your status or responsibilities as in effect as of the date of this Agreement. It is understood and agreed that until this Agreement becomes part of the public record (e.g. Proxy, 10K), you will not talk about, write about or otherwise publicize the terms or existence of this Agreement or any fact concerning its negotiation, execution or implementation. You may, however, discuss its contents with your spouse, legal and/or financial counselor. This Agreement is subject to the AT&T Non-Competition Guideline (Attachment B). The Special Benefits provided by this Agreement are made in lieu of all Company severance benefits and are conditioned upon you, within thirty days of your termination of Company employment, signing and not revoking, a Release and Agreement not to sue the Company. The form of this Release and Agreement will be that then (i.e., upon your Termination/retirement) in use for departing AT&T Senior Managers.) This Agreement reflects the entire understanding regarding the terms and conditions of the Special Benefits. Accordingly, it supersedes and completely replaces any prior oral or written communication on this subject. Moreover, the Agreement shall not be amended or modified without specific written provision to that effect, signed by you and the Company. This Agreement is not an employment contract and should not be construed or interpreted as containing any guarantee of continued employment. The employment relationship at AT&T is by mutual consent ("Employment-at-Will"). This means that employees have the right to terminate their employment at any time and for any reason. Likewise, the Company reserves the right to discontinue your employment with or without cause at any time and for any reason. The Agreement shall be construed and enforced in accordance with the laws of the State of New Jersey without reference to any applicable conflict of law provisions. The incentive plans, as well as the employee and the Senior Management benefit plans, programs and practices (as may be mentioned in this Agreement), reflect their current provisions. The Company reserves the right to discontinue or modify any such plans, programs and practices at any time. At your or the Company's option, any dispute, controversy, or question arising under, out of or relating to this Agreement or the breach thereof, shall be referred for decision by arbitration in the State of New Jersey by a neutral arbitrator selected by the parties hereto. The proceeding shall be governed by the Rules of the American Arbitration Association then in effect or such rules last in effect (in the event such Association is no longer in existence). If the parties are unable to agree upon such a neutral arbitrator within thirty (30) days after one party has given the other written notice of the desire to submit the dispute, controversy or question for decision as aforesaid, then either party may apply to the Presiding Judge of the Superior Court of any county in New Jersey for the appointment of a neutral arbitrator to hear the parties and settle the dispute, controversy or question, and such Judge is hereby authorized to make such appointment. In the event that either party exercises the right to submit a dispute arising hereunder to arbitration, the decision of the neutral arbitrator shall be final, conclusive and binding on all interested persons and no action at law or in equity shall be instituted or, if instituted, further prosecuted by either party other than to enforce the award of the neutral arbitrator. Both parties shall each bear all their own costs and attorney fees relating to any arbitration, except that the Company shall pay the costs of any arbitrator appointed hereunder. John, I am happy to present this special arrangement to you. It recognizes the extraordinary contribution you have made to our business. If you agree with the terms and conditions detailed above, please sign this Agreement in the space provided below and return the executed copy to me. Sincerely, Attachments - ----------------------------------- ------------------------------ Acknowledged and Agreed to Date J. D. Zeglis EX-10 13 EXHIBIT (10)(III)(A)23 AMENDED AND RESTATED EMPLOYMENT AGREEMENT AGREEMENT, made and entered into as of the 17th day of October, 1997, and herein amended and restated, by and between AT&T Corp., a New York corporation (together with its successors and assigns permitted under this Agreement, the "Company"), and C. Michael Armstrong (the "Executive"). W I T N E S S E T H : WHEREAS, the Company desires to employ the Executive and to enter into an agreement, as herein amended and restated, embodying the terms of such employment (this "Agreement") and the Executive desires to enter into this Agreement and to accept such employment, subject to the terms and provisions of this Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, the Company and the Executive (individually a "Party" and together the "Parties") agree as follows: 1. Definitions. (a) "Affiliate" of a person or other entity shall mean a person or other entity that directly or indirectly controls, is controlled by, or is under common control with the person or other entity specified. (b) "Base Salary" shall mean the salary provided for in Section 4 below or any increased salary granted to the Executive pursuant to Section 4. (c) "Board" shall mean the Board of Directors of the Company. (d) "Cause" shall mean: (i) the Executive is convicted of a felony involving moral turpitude; or (ii) the Executive is guilty of willful gross neglect or willful gross misconduct in carrying out his duties under this Agreement, resulting, in either case, in material economic harm to the Company, unless the Executive believed in good faith that such act or nonact was in the best interests of the Company. (e) "Change in Control" shall mean the occurrence of any of the following events: (i) An acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act") (an "Entity") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of Stock of the Company (the "Outstanding Company Stock") or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); excluding, however, the following: (1) any acquisition directly from the Company, other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Company, (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (4) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section 1(e); (ii) A change in the composition of the Board such that the individuals who, as of the effective date of this Agreement, constitute the Board (such Board shall be hereinafter referred to as the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that for purposes of this definition, any individual who becomes a member of the Board subsequent to the effective date of this Agreement, whose election, or nomination for election, by the Company's stockholders was approved by a vote of at least a two-thirds majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; and provided, further however, that any such individual whose initial assumption of office occurs as a result of or in connection with either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of an Entity other than the Board shall not be so considered as a member of the Incumbent Board; (iii) A merger, reorganization or consolidation to which the Company is a party or a sale or other disposition of all or substantially all of the assets of the Company (each, a "Corporate Transaction"); excluding however, such a Corporate Transaction pursuant to which (A) all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Company Stock and Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 60% of, respectively, the outstanding shares of common stock, and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation or other person which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries (a "Parent Company")) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Company Stock and Outstanding Company Voting Securities, as the case may be, (B) no Entity (other than the Company, any employee benefit plan (or related trust) of the Company, such corporation resulting from such Corporate Transaction (or, if reference was made to equity ownership of any Parent Company for purposes of determining whether clause (A) above is satisfied in connection with the applicable Corporate Transaction, such Parent Company) will beneficially own, directly or indirectly, 20% or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction (or, if reference was made to equity ownership of any Parent Company for purposes of determining whether clause (A) above is satisfied in connection with the applicable Corporate Transaction, such Parent Company) or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors unless such ownership resulted solely from ownership of securities of the Company prior to the Corporate Transaction, and (C) individuals who were members of the Incumbent Board will immediately after the consummation of the Corporate Transaction constitute at least a two-thirds majority of the members of the board of directors of the corporation resulting from such Corporate Transaction (or, if reference was made to equity ownership of any Parent Company for purposes of determining whether clause (A) above is satisfied in connection the applicable Corporate Transaction, of the Parent Company); or (iv) The approval by the stockholders of the Company of a plan of complete liquidation or dissolution of the Company. (f) "Constructive Termination Without Cause" shall mean termination by the Executive of his employment at his initiative following the occurrence of any of the following events without his consent: (i) a reduction in the Executive's then current Base Salary or target bonus opportunity as a percentage of Base Salary or long-term performance incentive or the termination or material reduction of any employee benefit or perquisite enjoyed by him (other than as part of an across-the-board reduction applicable to all executive officers of the Company); (ii) the failure to elect or reelect the Executive to any of the positions described in Section 3 or the removal of him from any such position; (iii) a material diminution in the Executive's duties or the assignment to the Executive of duties which are materially inconsistent with his duties or which materially impair the Executive's ability to function as the Chairman and Chief Executive Officer of the Company; (iv) the relocation of the Company's principal office, or the Executive's own office location, as assigned to him by the Company to a location more than 50 miles from Basking Ridge, New Jersey; or (v) the failure of the Company to obtain the assumption in writing of its obligation to perform this Agreement by any successor to all or substantially all of the assets of the Company within 15 calendar days after a merger, consolidation, sale or similar transaction. Following written notice from the Executive, as described above, the Company shall have 15 calendar days in which to cure. If the Company fails to cure, the Executive's termination shall become effective on the 16th calendar day following the written notice. (g) "Disability" shall mean the Executive's inability, due to physical or mental incapacity, to substantially perform his duties and responsibilities under this Agreement as determined by a medical doctor selected by the Company and the Executive. If the Parties cannot agree on a medical doctor, each Party shall select a medical doctor and the two doctors shall select a third who shall be the approved medical doctor for this purpose. (h) "Effective Date" shall mean the date as of which this Agreement was entered into. (i) "Fair Market Value" shall mean the value of a share of Stock as traded on the New York Stock Exchange on the date in question, based on the mean of the high and low reported prices. (j) "Pro Rata" shall mean a fraction, the numerator of which is the number of days that the Executive was employed in the applicable performance period (a calendar year in the case of an annual bonus and a performance cycle in the case of an award under the Long-Term Incentive Plan) and the denominator of which shall be the number of days in the applicable performance period. (k) "Stock" shall mean the Common Stock of the Company. (l) "Term of Employment" shall mean the period specified in Section 2 below (including any extension as provided therein). 2. Term of Employment. The Term of Employment shall begin on the Effective Date, and shall extend until October 31, 2003. Notwithstanding the foregoing, the Term of Employment may be earlier terminated by either Party in accordance with the provisions of Section 12. 3. Position, Duties and Responsibilities. (a) Commencing on the Effective Date and continuing for the remainder of the Term of Employment, the Executive shall be employed as the Chairman of the Board and Chief Executive Officer of the Company and be responsible for the general management of the affairs of the Company. The Executive has also been elected by the Board as a member of the Board, effective October 20, 1997. The Executive, in carrying out his duties under this Agreement, shall report to the Board. During the Term of this Agreement, the Executive shall devote his full business time and attention to the business and affairs of the Company and shall use his best efforts, skills and abilities to promote its interests. (b) Nothing herein shall preclude the Executive from (i) serving on the boards of directors of a reasonable number of other corporations subject to the approval of the Board in each case (which approval has been given as to the boards listed in Exhibit A attached), (ii) serving on the boards of a reasonable number of trade associations and/or charitable organizations, (iii) engaging in charitable activities and community affairs, and (iv) managing his personal investments and affairs, provided that such activities set forth in this Section 3(b) do not materially interfere with the proper performance of his duties and responsibilities under Section 3(a). 4. Base Salary. The Executive shall be paid an annualized Base Salary, payable in accordance with the regular payroll practices of the Company, of $1,400,000. The Base Salary shall be reviewed annually for increase in the discretion of the Board. 5. Annual Incentive Award. During the Term of Employment, commencing in 1998 the Executive shall participate in the AT&T Short Term Incentive Award Plan or any successor annual incentive award plan of the Company. Under such plan, the Executive shall have a target bonus opportunity each year equal to 100% of his then Base Salary, payable in that amount if the performance goals established for the relevant year are met. If such performance goals are not met, the Executive shall receive a lesser amount (or nothing) as determined in accordance with applicable plan guidelines. If such performance goals are exceeded, the Executive may receive a greater amount as determined in accordance with applicable plan guidelines. For 1998 the Executive shall be paid a guaranteed annual incentive award of no less than 100% of his target bonus (whether or not performance goals have been met in such year). The Executive shall be paid his annual incentive awards no later than other senior executives of the Company are paid their annual incentive awards. 6. Cash Award. In order to address certain forfeitures experienced when the Executive left his previous employer, the Company shall pay a premium of $2,050,000 to purchase a split-dollar survivorship insurance policy under an Estate Enhancement Program insuring the Executive and his spouse. Such policy shall, upon the death of the last surviving insured, provide insurance proceeds equal to the sum of the face amount of the policy and the policy's cash value. An amount equal to the policy face amount shall be payable to the Executive's beneficiaries or to a trust which may be established to own the Executive's interest in such policy. The balance of the proceeds shall be paid to the Company, and from its share of the death benefit, the Company will pay a Company-paid death benefit to the Executive's beneficiaries equal to the death benefit received by the Company, minus the Company-paid premium. It is agreed and understood that the face amount of such split-dollar survivorship insurance policy will be determined in accordance with the underwriting requirements of the insurance company providing such coverage, based on the Company's premium payment of $2,050,000, pursuant to this Section 6 and any additional premium payments, if any, that the Executive may become eligible for under any similar program adopted by the Company for its senior executives and in which the Executive elects to participate. Prior to the Company purchasing insurance under this paragraph, Executive will make a reasonable effort (but not including litigation) to obtain all or a portion of his 1997 annual bonus and his long-term incentive bonus for the 1995-1997 performance cycle from his current employer, and he will notify the Company, in writing, of the outcome of such efforts. 7. Stock Awards. (a) General. On the Effective Date, the Company shall grant the Executive restricted stock, restricted stock units and stock option awards described in this Section 7. The Executive also shall be eligible to participate in the Company's 1997 Long-Term Incentive Plan ("LTIP") as provided in Section 8 below. (b) Restricted Stock Award. As of the Effective Date, the Company shall grant the Executive an award of 105,330 shares of restricted Stock ("Restricted Stock") substantially in the form attached to this Agreement as Exhibit C, vesting as follows: (i) 19,072 shares shall vest on January 1, 1999; (ii) 18,294 shares shall vest on January 1, 2000; (iii) 8,022 shares shall vest at the rate of 25%, 2006 shares on each of May 1, 1998 and May 1, 1999 and 2005 shares on each of May 1, 2000 and May 1, 2001; (iv) 26,815 shares shall vest as follows: 8,939 shares on May 1, 1998, and 8,938 shares on each of May 1, 1999 and May 1, 2000; and (v) 33,127 shares shall vest at the rate of 25%, 8282 shares on each of the first three anniversaries of the Effective Date and 8281 shares on the fourth anniversary of the Effective Date. (c) Restricted Stock Unit Award. As of the Effective Date, the Company shall grant the Executive an award of 224,561 shares of restricted stock units (the "Restricted Stock Units") substantially in the form attached to this Agreement as Exhibit D, vesting as provided in and subject to the provisions of Exhibit D. (d) Stock Option Award. As of the Effective Date, the Company shall grant the Executive a ten-year stock option award, substantially in the form attached to this Agreement as Exhibit E, to purchase 750,000 shares of Stock. The exercise price shall be the Fair Market Value on the Effective Date which the Board has fixed as the date of grant, which is $44.53125 per share. The award shall vest as provided in Exhibit E. (e) Anything herein to the contrary notwithstanding, the numbers of shares of restricted stock and restricted stock units referred to in Section 7(b) and (c) above shall be reduced to the extent the Executive's similarly related awards from his prior employer (to which such awards under Section 7(b) and (c) relate) are not in fact forfeited. 8. Long-Term Incentive Awards. (a) Performance Awards. The Executive shall be eligible to participate in the LTIP, commencing with the 1998-2000 cycle. The Executive shall not be eligible to participate in any prior LTIP performance cycles including the 1996-1998 and the 1997-1999 LTIP performance cycles. The Executive shall receive a target award under each of the 1998-2000 and 1999-2001 performance cycles that shall be no less than 100% of his then Base Salary (target amount). (b) Stock Option Awards. The Executive shall be eligible for stock option awards commencing with awards in 1998 in accordance with Company practices applicable to an executive in his position. 9. Supplemental Pension. (a) The Executive shall be entitled to a pension benefit in the form of a single life annuity commencing upon retirement at or after age 65 (subject to earlier commencement as provided in Section 9(e) below) equal to 50% of his Final Average Compensation offset by certain amounts as provided in Section 9(b) below. For purposes of this Section 9, Final Average Compensation shall mean the sum of the base salary and annual incentive award payments paid in respect of the three calendar years of the Executive's employment by the Company during the last five calendar years of such employment during which he received the highest level of such payments, divided by three. If the Executive's employment with the Company terminates prior to his completion of three calendar years of employment, his Final Average Compensation shall be based on the average of his complete calendar years of employment with the Company. If the Executive does not complete one calendar year of employment, his Final Average Compensation shall be calculated by deeming his Base Salary for the year to be his Base Salary at the annualized rate in effect immediately prior to his termination of employment and by deeming his Annual Incentive Award for that year to be the original target Annual Incentive Award for that year. (b) The annual annuity payment determined under Section 9(a) for any year shall be offset by (i) the greater of (A) $655,642 and (B) the actual pension benefits to be paid to the Executive with respect to that year by the Executive's prior employers under their respective tax-qualified and non-tax-qualified defined benefit pension plans, (ii) any other pension benefits provided to the Executive under any other pension plan or pension arrangement except the AT&T Long-Term Savings Plan for Management Employees and the AT&T Senior Management Incentive Award Deferral Plan of the Company and (iii) any government-sponsored pension including Social Security retirement benefits. The supplemental pension benefits payable under this Section 9 shall be afforded the same post-employment "ad hoc" inflation adjustments, if any, as may from time to time be given to comparable former senior executives of the Company receiving benefits under the Company's Management Pension Plan. Payment of the pension benefit provided under this Section 9 shall be conditioned upon the Executive furnishing the Company promptly following retirement with written information regarding offsetting payments from prior employers and any government-sponsored pension and shall continue to be conditioned upon his promptly furnishing the Company with written information as to any changes in such offsetting payments. (c) In determining the amount of any offset under Section 9(b), such amount shall be calculated on an actuarially equivalent basis assuming the same frequency of payment and the same form of annuity as the pension benefit to be paid under this Section 9. (d) Except as otherwise provided in Section 12, the Executive's entitlement to the pension benefit under this Section 9 shall vest at the rate of 20% on each of the first five anniversaries of the Effective Date, with the entitlement fully vested on the fifth anniversary. (e) Except as otherwise provided in this Section 9, the Executive's entitlements to the pension benefit under this Section 9, including without limitation methods of payment, rights to elect lump sum payment or joint and survivor benefits, rights of survivors, claims procedures, actuarial assumptions, etc., shall be determined in accordance with the provisions and practices of the Company's Management Pension Plan as then in effect; provided, however, that the Executive shall be deemed to have satisfied any service-period requirement for eligibility for pre-retirement survivor annuity benefits and all other Plan purposes except for vesting and the determination of the amount of any early retirement benefit. In the event the Executive terminates employment so as to be entitled to a pension benefit under this Section 9(a) prior to age 65, the actual pension benefit payable to him under this Section 9 shall be adjusted for early commencement in accordance with the actuarial assumptions then in effect under the Company's Management Pension Plan. 10. Employee Benefit Programs. During the Term of Employment, the Executive shall be entitled to participate in all employee pension and welfare benefit plans and programs made available to the Company's senior level executives or to its employees generally, as such plans or programs may be in effect from time to time, including, without limitation, pension, profit sharing, savings and other retirement plans or programs, 401(k), medical, dental, hospitalization, short-term and long-term disability and life insurance plans, accidental death and dismemberment protection, travel accident insurance, and any other pension or retirement plans or programs and any other employee welfare benefit plans or programs that may be sponsored by the Company from time to time, including any plans that supplement the above-listed types of plans or programs, whether funded or unfunded. The Executive's participation shall be based on, and the calculation of all benefits shall be based on, the assumptions that the Executive has met all service-period or other requirements for such participation provided that no such assumptions shall be made as to a tax-qualified plan if such assumption would jeopardize the tax-qualified status of such plan. 11. Reimbursement of Business and Other Expenses; Perquisites; Vacations. (a) The Executive is authorized to incur reasonable expenses in carrying out his duties and responsibilities under this Agreement and the Company shall promptly reimburse him for all business expenses incurred in connection with carrying out the business of the Company, subject to documentation in accordance with the Company's policy. The Company shall pay all reasonable financial consultant and legal fees and expenses incurred by the Executive in connection with the negotiation of the Executive's employment arrangements with the Company. (b) During the Term of Employment, the Executive shall be entitled to participate in each of the Company's perquisites in accordance with the terms and conditions of such arrangements as they are in effect from time to time for the Company's chief executive officer, including without limitation security protection, automobile, club dues, tax preparation and financial counseling, use of corporate aircraft and limousine services. (c) The Executive shall be entitled to reimbursement of his relocation expenses in accordance with the Company's Management Relocation Plan. In connection with establishing a new principal residence in the Morristown, New Jersey area, the Executive shall in all events be entitled to reimbursement of expenses incurred in moving his family and personal belongings to that area. The Executive shall be entitled to reimbursement for reasonable expenses in the form of real estate listings, commissions, legal costs and similar expenses in disposing of his residence in the Manhattan Beach, California area as well as any similar expenses incurred in acquiring a residence in the Morristown, New Jersey area. The Executive shall also be entitled to protection against any loss on the Manhattan Beach residence, which will be based on his cost (acquisition cost plus costs of improvement) less (i) market appraisal (as described below) or, if greater, (ii) the actual sale price. The Company's obligation to protect the Executive against loss as described above is subject to the following condition: The Executive shall have 15 calendar days following receipt of an appraisal as described in the following sentence to sell the Manhattan Beach residence to the Company. The appraisal shall be based on an appraisal by a nationally recognized appraiser agreed upon by the Parties, the cost of the appraisal to be paid by the Company. If the Parties do not agree upon an appraiser, each shall designate an appraiser and the two appraisers shall select from among nationally recognized appraisers a third appraiser who shall make the appraisal. If the Executive does not agree to sell the residence to the Company based on the appraisal, the Company shall have no further obligation except to pay the Executive the difference between the cost of the residence as described above and the appraisal, assuming that this results in a loss to the Executive. The Company also shall pay the Executive's temporary living expenses in New Jersey and provide assistance in connection with financing the purchase of a new home there in accordance with its regular practices. To the extent the Company's reimbursement of the Executive's relocation expenses results in taxable income to the Executive, the Company shall gross up such expenses so that the Executive is not out of pocket for any Federal, state or local income, employment, excise or other taxes on such reimbursement including the gross-up amounts. (d) The Executive shall be entitled to five weeks paid vacation per year of employment, which shall accrue and otherwise be subject to the Company's vacation policy for senior executives. 12. Termination of Employment. (a) Termination Due to Death. In the event that the Executive's employment is terminated due to his death, his estate or his beneficiaries, as the case may be, shall be entitled to the following benefits: (i) Base Salary through the end of the month in which death occurs; (ii) annual incentive award for the year in which the Executive's death occurs, based on the original target award performance for such year, payable in a single installment promptly after his death; (iii) all outstanding options, whether or not then exercisable, shall become exercisable and shall remain exercisable until the end of their originally scheduled terms; (iv) the restrictions on restricted stock shall lapse; (v) payment of Restricted Stock Units in accordance with Section 7(c) and Exhibit D; (vi) payout for each LTIP performance cycle in which the Executive was participating at the time of his death, based on the original target performance under the plan, payable in a single installment promptly after his death; and (vii) the supplemental pension benefit provided in Section 9 shall fully vest. (b) Termination Due to Disability. In the event that the Executive's employment is terminated due to his Disability, he shall be entitled to the following benefits: (i) disability benefits in accordance with the long-term disability program then in effect for senior executives of the Company; (ii) Base Salary through the end of the month in which disability benefits commence; (iii) annual incentive award for the year in which the Executive's termination occurs, based on the original target award for such year, payable in a single installment promptly after his termination; (iv) all outstanding options, whether or not then exercisable, shall become exercisable and shall remain exercisable until the end of their originally scheduled terms; (v) the restrictions on any restricted stock shall lapse; (vi) payment of Restricted Stock Units in accordance with Section 7(c) and Exhibit D; (vii) a payout for each LTIP performance cycle in which the Executive was participating at the time of his termination, based on the original target performance under the plan, payable in accordance with the plan; and (viii) the supplemental pension benefit provided in Section 9 shall fully vest with offset for any Company-provided disability benefits. In no event shall a termination of the Executive's employment for Disability occur until the Party terminating his employment gives written notice to the other Party in accordance with Section 25 below. (c) Termination by the Company for Cause. (i) A termination for Cause shall not take effect unless the provisions of this paragraph (i) are complied with. The Executive shall be given written notice by the Board of the intention to terminate him for Cause, such notice (A) to state in detail the particular act or acts or failure or failures to act that constitute the grounds on which the proposed termination for Cause is based and (B) to be given within six months of the Board learning of such act or acts or failure or failures to act. The Executive shall have ten calendar days after the date that such written notice has been given to the Executive in which to cure such conduct, to the extent such cure is possible. If he fails to cure such conduct, the Executive shall then be entitled to a hearing before the Board. Such hearing shall be held within 15 calendar days of such notice to the Executive, provided he requests such hearing within ten calendar days of the written notice from the Board of the intention to terminate him for Cause. If, within five calendar days following such hearing, the Executive is furnished written notice by the Board confirming that, in its judgment, grounds for Cause on the basis of the original notice exist, he shall thereupon be terminated for Cause. (ii) In the event the Company terminates the Executive's employment for Cause: (A) he shall be entitled to Base Salary through the date of the termination; (B) all outstanding options which are not exercisable shall be forfeited; exercisable options shall remain exercisable until the earlier of the ninetieth day after the date of termination or the originally scheduled expiration date of the options unless the Compensation and Employee Benefits Committee determines otherwise; (C) all restricted stock as to which restrictions have not lapsed shall be forfeited; (D) Restricted Stock Units shall be forfeited in accordance with Exhibit D; (E) all LTIP awards with respect to performance cycles which have not yet been completed shall be forfeited; and (F) any unvested supplemental pension benefit to which the Executive would otherwise be entitled under Section 9 shall be forfeited. (d) Termination without Cause or Constructive Termination without Cause. In the event the Executive's employment is terminated by the Company without Cause, other than due to Disability or death, or in the event there is a Constructive Termination without Cause, the Executive shall be entitled to the following benefits: (i) Base Salary through the date of termination; (ii) Base Salary, at the annualized rate in effect on the date of termination, for a period of 24 months following such termination, provided that, at the Executive's option, the Company shall pay him the present value of such salary continuation payments in a lump sum (using as the discount rate the applicable Federal rate specified under Section 1274 of the Internal Revenue Code of 1986, as amended (the "Code"), for short-term Treasury obligations as published by the Internal Revenue Service for the month in which such termination occurs); (iii) a Pro Rata annual incentive award for the year in which termination occurs, based on his original target award for such year, payable when annual incentive awards are paid to other senior executives (or in a lump sum in accordance with the proviso in Section 12(d)(ii)); (iv) an annual incentive award for a period of 24 months following the date of termination, based on his original target award for the year in which termination occurs and payable in equal monthly installments over the 24-month period of Base Salary continuation payments pursuant to Section 12(d)(ii) (or in a lump sum in accordance with the proviso in Section 12(d)(ii)); (v) all outstanding options, whether or not then exercisable, shall become exercisable and shall remain exercisable until the end of their originally scheduled terms; (vi) the restrictions on restricted stock shall lapse; (vii) payment of Restricted Stock Units in accordance with Section 7(c) and Exhibit D; (viii) payout for each LTIP performance cycle in which the Executive was then participating, based on the original target performance, payable in accordance with the plan (or in a lump sum in accordance with the proviso in Section 12(d)(ii)); (ix) the supplemental pension benefit provided in Section 9 shall fully vest; and (x) the Executive shall be entitled to continued participation in all medical, dental, vision and hospitalization insurance coverage and in other employee benefit plans or programs in which he was participating on the date of his termination until the earlier of: (A) 24 months following the date of termination and (B) the date, or dates, he receives equivalent coverage and benefits under the plans and programs of a subsequent employer. The Executive shall promptly advise the Company of any such subsequent employment and the benefits he receives in connection therewith. (e) Voluntary Termination; Retirement. (i) A termination of employment by the Executive on his own initiative, other than a termination due to death or Disability or a Constructive Termination without Cause or retirement following the end of the Term of Employment, shall have the same consequences as provided in Section 12(c)(ii) for a termination for Cause. A voluntary termination under this Section 12(e) shall be effective 30 calendar days after prior written notice is received by the Company. (ii) The Executive may retire at any time following the end of the Term of Employment and thereupon commence receiving payments of his supplemental pension as provided in Section 9 and any other benefits to which he is entitled as a retired senior executive in accordance with the Company's then existing plans and practices. Upon such retirement all restrictions on restricted stock which have not already lapsed will thereupon lapse, payment of all Restricted Stock Units will be made in accordance with their terms and all stock options will continue to be exercisable for the remainder of their respective terms. (f) Consequences of a Change in Control. (i) If, following a Change in Control, the Executive's employment is terminated by the Company without Cause, other than due to Disability or death, or there is a Constructive Termination without Cause, the Executive shall be entitled to the benefits provided in Section 12(d) above, except that the period for which salary, annual incentive and benefits are provided in Sections 12(d)(ii), 12(d)(iv) and 12(d)(x) (except that the Executive may in his discretion, to the extent the plans permit, elect to continue his benefits under Section 12(d)(x) in lieu of the lump sum payment therefor) shall be 48 months, and all payments to be made pursuant to those Sections and the payments to be made pursuant to Sections 12(d)(iii) and 12(d)(viii) shall be paid to the Executive in a lump sum promptly following the date of termination. (ii) Immediately following a Change in Control, all amounts and benefits to which the Executive is entitled but not yet vested, whether under this Agreement or otherwise, and except as provided in Exhibit D with respect to Restricted Stock Units, shall become fully vested. (iii) If, following a Change in Control, the aggregate of all payments or benefits made or provided to the Executive under Section 12(f)(i) and under all other plans and programs of the Company (the "Aggregate Payment") is determined to constitute a Parachute Payment within the meaning of Section 280G(b)(2) of the Code, the Company shall pay to the Executive, prior to the time any excise tax imposed by Section 4999 of the Code ("Excise Tax") is payable with respect to such Aggregate Payment, an additional amount (the "Gross-Up Payment") which, after the imposition of all income, employment, excise and other taxes thereon, is equal to the Excise Tax on the Aggregate Payment. The determination of whether the Aggregate Payment constitutes a Parachute Payment and, if so, the amount to be paid to the Executive and the time of payment pursuant to this Section 12(f)(iii) shall be made by an independent auditor (the "Auditor") selected by the Parties and paid by the Company. The Auditor shall be a nationally recognized United States public accounting firm which has not, during the two years preceding the date of its selection, acted in any way on behalf of the Company or any Affiliate thereof. If the Executive and the Company cannot agree on the firm to serve as the Auditor, then the Executive and the Company shall each designate one accounting firm and those two firms shall jointly select the accounting firm to serve as the Auditor. All fees and expenses of the Auditor shall be borne solely by the Company. Any Gross-Up Payment shall be paid by the Company to the Executive within five calendar days of the receipt of the Auditor's determination. Any determination by the Auditor shall be binding upon the Company and the Executive. As a result of uncertainty in the application of Sections 280G and 4999 of the Code at the time of the initial determination by the Auditor hereunder, it is possible that the Gross-Up Payment made will have been an amount more than the Company should have paid pursuant to this Section 12(f)(iii) (the "Overpayment") or that the Gross-Up Payment made will have been an amount less than the Company should have paid pursuant to this Section 12(f)(iii) (the "Underpayment"). In the event that there is a final determination by the Internal Revenue Service, or a final determination by a court of competent jurisdiction, that an Overpayment has been made, any such Overpayment shall be treated for all purposes as a loan to the Executive which the Executive shall repay to the Company together with interest at the applicable Federal rate provided for in Section 7872(f)(2) of the Code. In the event that there is a final determination by the Internal Revenue Service, a final determination by a court of competent jurisdiction or a change in the provisions of the Code or regulations pursuant to which an Underpayment arises under this Agreement, any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive together with interest at the applicable Federal rate provided for in Section 7872(f)(2) of the Code. The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would result in an Underpayment and would require the payment by the Company of an additional Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30 calendar day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (A) give the Company any information reasonably requested by the Company relating to such claim, (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (C) cooperate with the Company in good faith in order effectively to contest such claim, and (D) permit the Company to participate in any proceeding relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income or employment tax (including interest and penalties with respect thereto) imposed as a result of such proceeding and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 12(f)(iii), the Company shall control all proceedings taken in connection with such contest, provided that the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (g) Other Termination Benefits. In the case of any of the foregoing terminations, the Executive or his estate shall also be entitled to: (i) the balance of any incentive awards due for performance periods which have been completed, but which have not yet been paid; (ii) the entire amount of all amounts owing under Section 6, including all deferrals pursuant to Section 6 (if any such amounts have been deferred); (iii) any expense reimbursements due the Executive; and (iv) other benefits, if any, in accordance with applicable plans and programs of the Company. (h) No Mitigation; No Offset. In the event of any termination of employment under this Section 12, the Executive shall be under no obligation to seek other employment and there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment that he may obtain. (i) Nature of Payments. Any amounts due under this Section 12 are in the nature of severance payments considered to be reasonable by the Company and are not in the nature of a penalty. 13. Confidentiality. (a) The Executive agrees that he will not, at any time during the Term of Employment or thereafter, disclose or use any trade secret, proprietary or confidential information of the Company or any subsidiary or affiliate of the Company, obtained during the course of his employment, except as required in the course of such employment or with the written permission of the Company or, as applicable, any subsidiary or affiliate of the Company or as may be required by law, provided that, if the Executive receives legal process with regard to disclosure of such information, he shall promptly notify the Company and cooperate with the Company in seeking a protective order. (b) The Executive agrees that at the time of the termination of his employment with the Company, whether at the instance of the Executive or the Company, and regardless of the reasons therefor, he will deliver to the Company, and not keep or deliver to anyone else, any and all notes, files, memoranda, papers and, in general, any and all physical matter containing information, including any and all documents significant to the conduct of the business of the Company or any subsidiary or Affiliate of the Company which are in his possession, except for any documents for which the Company or any subsidiary or Affiliate of the Company has given written consent to removal at the time of the termination of the Executive's employment and his personal rolodex, phone book and similar items. (c) The Executive agrees that the Company's remedies at law would be inadequate in the event of a breach or threatened breach of this Section 13; accordingly, the Company shall be entitled, in addition to its rights at law, to an injunction and other equitable relief without the need to post a bond. 14. Noncompetition. (a) Subject to the provisions of Section 14(b) below and notwithstanding any other provisions of this Agreement, any and all payments (except those made from Company-sponsored tax-qualified pension or welfare plans), benefits or other entitlements to which the Executive may be eligible in accordance with the terms hereof, may be forfeited, whether or not in pay status, at the discretion of the Company, if the Executive at any time without the consent of the Company "establishes a relationship with a competitor" or "engages in an activity" which is in conflict with or adverse to the interest of the Company, all within the meaning of the Non-Competition Guideline referred to below (a "Competitive Activity"). The payments, benefits and other entitlements hereunder are being made in part in consideration of the obligations of this Section 14 and in particular the post-employment payments, benefits and other entitlements are being made in consideration of, and dependent upon, compliance with this Section 14(a) and, to the extent set forth in Section 14(e), the Release and Agreement referred to in Section 14(e). Exhibit F is a copy of the Non-Competition Guideline. (b) Anything in Section 14(a) to the contrary notwithstanding, no forfeiture or cancellation shall take place with respect to any payments, benefits or entitlements hereunder or under any other award agreement, plan or practice unless the Company shall have first given the Executive written notice of its intent to so forfeit, or cancel or pay out and Executive has not, within 30 calendar days of giving such notice, ceased such unpermitted Competitive Activity, provided that the foregoing prior notice procedure shall not be required with respect to (x) a Competitive Activity which the Executive initiated after the Company had informed the Executive in writing that it believed such Competitive Activity violated Section 14(a) or the AT&T Non-Competition Guideline, (y) any Competitive Activity regarding local, regional or long distance telephone services or other products or services which are part of a line of business which represents more than 5% percent of the Company's consolidated gross revenues for its most recent completed fiscal year at the time the Competitive Activity commences. (c) Nothing in this Section 14 shall prohibit the Executive from being a passive owner of not more than one percent of the outstanding common stock, capital stock and equity of any firm, corporation or enterprise so long as the Executive has no active participation in the management of business of such firm, corporation or enterprise. (d) If the restrictions stated herein are found by a court to be unreasonable, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court shall revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. (e) Any payments or benefits made pursuant to Section 12 are: (1) subject to the provisions, restrictions and limitations of Section 14 above, but not otherwise subject to offset or mitigation, (2) subject to the Executive's signing a Release and Agreement not to sue the company in the form of Exhibit G hereto with such changes therein or additions thereto as needed under then applicable law to give effect to the intent of the Release and Agreement and (3) receipt of Executive's resignation from all offices, directorships and fiduciary positions with the Company, its Affiliates and their respective benefit plans. Notwithstanding the due date of any post-employment payment, any amounts due under Section 12 shall not be due until after the end of any applicable revocation period with regard to the Release and Agreement. (f) In no event shall the Executive be required to repay to the Company any amount previously received by the Executive from the Company, except to the extent required by the AT&T Non-Competition Guideline. 15. Resolution of Disputes. Any disputes arising under or in connection with this Agreement shall be resolved by third party mediation of the dispute and, failing that, by binding arbitration, to be held in New Jersey, in accordance with the rules and procedures of the American Arbitration Association. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Each Party shall bear his or its own costs of the mediation, arbitration or litigation, except that the Company shall bear all such costs if the Executive prevails in such mediation, arbitration or litigation on any material issue. 16. Indemnification. (a) The Company agrees that if the Executive is made a party, or is threatened to be made a party, to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director, officer or employee of the Company or is or was serving at the request of the Company as a director, officer, member, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is the Executive's alleged action in an official capacity while serving as a director, officer, member, employee or agent, the Executive shall be indemnified and held harmless by the Company to the fullest extent legally permitted or authorized by the Company's certificate of incorporation or bylaws or resolutions of the Company's Board of Directors or, if greater, by the laws of the State of New Jersey, against all cost, expense, liability and loss (including, without limitation, attorney's fees, judgments, fines, ERISA excise taxes or other liabilities or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Executive in connection therewith, and such indemnification shall continue as to the Executive even if he has ceased to be a director, member, employee or agent of the Company or other entity and shall inure to the benefit of the Executive's heirs, executors and administrators. The Company shall advance to the Executive all reasonable costs and expenses incurred by him in connection with a Proceeding within 20 calendar days after receipt by the Company of a written request for such advance. Such request shall include an undertaking by the Executive to repay the amount of such advance if it shall ultimately be determined that he is not entitled to be indemnified against such costs and expenses. (b) Neither the failure of the Company (including its board of directors, independent legal counsel or stockholders) to have made a determination prior to the commencement of any proceeding concerning payment of amounts claimed by the Executive under Section 16(a) above that indemnification of the Executive is proper because he has met the applicable standard of conduct, nor a determination by the Company (including its board of directors, independent legal counsel or stockholders) that the Executive has not met such applicable standard of conduct, shall create a presumption that the Executive has not met the applicable standard of conduct. (c) The Company agrees to continue and maintain a directors' and officers' liability insurance policy covering the Executive to the extent the Company provides such coverage for its other executive officers. 17. Assignability; Binding Nature. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of the Executive) and assigns. Rights or obligations of the Company under this Agreement may be assigned or transferred by the Company pursuant to a merger or consolidation in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law. The Company further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall take whatever action it reasonably can in order to cause such assignee or transferee to expressly assume the liabilities, obligations and duties of the Company hereunder. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his rights to compensation and benefits, which may be transferred only by will or operation of law. 18. Representation. The Company represents and warrants that it is fully authorized and empowered to enter into this Agreement and that the performance of its obligations under this Agreement will not violate any agreement between it and any other person, firm or organization. The Executive represents that the performance of his obligations under this Agreement will not violate any agreement between him and any other person, firm or organization that would be violated by the performance of his obligations under this Agreement. 19. Entire Agreement. This Agreement contains the entire understanding and agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Parties with respect thereto. 20. Amendment or Waiver. No provision in this Agreement may be amended unless such amendment is agreed to in writing and signed by the Executive and an authorized officer of the Company. No waiver by either Party of any breach by the other Party of any condition or provision contained in this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by the Executive or an authorized officer of the Company, as the case may be. 21. Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law so as to achieve the purposes of this Agreement. 22. Survivorship. Except as otherwise expressly set forth in this Agreement, the respective rights and obligations of the Parties hereunder shall survive any termination of the Executive's employment. This Agreement itself (as distinguished from the Executive's employment) may not be terminated by either Party without the written consent of the other Party. 23. References. In the event of the Executive's death or a judicial determination of his incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to his beneficiary, estate or other legal representative. 24. Governing Law/Jurisdiction. This Agreement shall be governed in accordance with the laws of New Jersey without reference to principles of conflict of laws. 25. Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed given when (a) delivered personally, (b) sent by certified or registered mail, postage prepaid, return receipt requested or (c) delivered by overnight courier (provided that a written acknowledgment of receipt is obtained by the overnight courier) to the Party concerned at the address indicated below or to such changed address as such Party may subsequently give such notice of: If to the Company: AT&T 295 North Maple Avenue Basking Ridge, NJ 07920 Attention: Executive Vice President Human Resources If to the Executive: Mr. C. Michael Armstrong c/o AT&T 295 North Maple Avenue Basking Ridge, NJ 07920 26. Headings. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 27. Counterparts. This Agreement may be executed in two or more counterparts. 28. Conditions. The effectiveness of this Agreement is conditioned upon the following: (i) there being no agreement between the Executive and any prior employer that interferes or could interfere with his employment with the Company unless such agreement is to the satisfaction of the Company waived by such prior employer; and (ii) the Executive passes a physical examination to the satisfaction of the Company in accordance with its policy on pre-employment physical examinations. IN WITNESS WHEREOF, the undersigned have executed this Amended and Restated Agreement on March __, 1998 as of the date first written above. AT&T Corp. By:______________________________ H. W. Burlingame ------------------------------ C. Michael Armstrong EXHIBITS [To be supplied] A. DIRECTORSHIPS B. DEFERRED ACCOUNT AGREEMENT C. RESTRICTED STOCK AWARD D. RESTRICTED STOCK UNIT AWARD E. STOCK OPTION AGREEMENT F. A CO. NON-COMPETITION GUIDELINES G. RELEASE AND AGREEMENT EXHIBIT A DIRECTORSHIPS The Times Mirror Company Travelers Group Inc. TBG (private company, Supervisory Board) EXHIBIT B AT&T SENIOR MANAGEMENT INCENTIVE AWARD DEFERRAL PLAN DEFERRAL ELECTION Pursuant to the terms of the AT&T Senior Management Incentive Award Deferral Plan (the "Plan"), I hereby elect to defer receipt of the amounts and/or shares which would otherwise be payable to me during the calendar year ____ and each calendar year thereafter, to the extent indicated on LINE 1 below. This election shall continue until I terminate or modify such election by written notice. Any such termination or modification shall become effective as of the end of the calendar year in which such notice is given with respect to all awards which would otherwise be payable to me in subsequent calendar years. I also hereby elect: (A) that all amounts and/or shares deferred pursuant to this election together with accumulated interest and/or additional shares shall be distributed to me in the number of annual installment(s) indicated on LINE 2 below, or the number of annual installments which do not extend beyond my life expectancy at the time the installments begin, if less. The first installment (or single payment if I have so elected) shall be paid as soon as practicable: I. after the first day of the calendar quarter following the end of the month in which I retire or otherwise terminate employment with a Company participating in the Plan (other than a transfer to another such Company). II. after the first day of the calendar quarter following the end of the month in which I attain the age indicated on LINE 3 below. Indicate Option I or II on LINE 3 below: (Retirees may only elect Option II) (B) in the event I should die before full payment of the amounts deferred plus accumulated interest, the balance shall be distributed to my beneficiary or beneficiaries in the number of annual installments indicated on LINE 4 below of which the first installment (or single payment if I have so elected) shall be paid as soon as practicable after the first day of the calendar quarter following the month of death. LONG TERM LONG TERM DIVIDEND SHORT TERM LINE ELECTION SHARE CASH EQUIVALENTS AWARD 1 % Deferred See % from See % from Summary Summary __________% _________% Request Request 2 # Payments to Self (not to exceed 20) __________ __________ __________ __________ 3 Indicate Option I or II __________ __________ __________ __________ If Option II, indicate age (not less than 55 nor greater than 70.5 years) __________ __________ __________ __________ 4 # Payments to (not to exceed 10) __________ __________ __________ __________ The elections made herein, as they relate to amounts and/or shares otherwise payable in any calendar year, shall become IRREVOCABLE on the last day prior to the beginning of such calendar year. The only exception is that the number of installments elected for your beneficiary (LINE 4) may be changed at any time. ___________________________________ ___________________________________ Print Name Social Security Number ___________________________________ ___________________________________ Signature Date EXHIBIT C AT&T 1997 Long Term Incentive Program Restricted Stock Award Agreement - -------------------------------------------------------------------------------- Name of Participant Social Security Number Date of Grant - -------------------------------------------------------------------------------- Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan. - -------------------------------------------------------------------------------- Pursuant to the AT&T 1997 Long Term Incentive Program of AT&T Corp. (the "Plan"), a copy of which has been delivered to you, and in accordance with the terms and conditions of the Plan and your agreement to the further terms, conditions and restrictions set forth below, you have been granted as of the date hereof 00,000 common shares of the Company (the "Restricted Shares"). 1. The Restricted Shares shall vest and become nonforfeitable in accordance with paragraphs 2 and 3 hereof. the period beginning on the date hereof and ending on the day prior to the date on which any Restricted Share becomes nonforfeitable in accordance with paragraphs 2 and 3 (the "Vesting Date") is herein referred to as the "Restriction Period" with respect to any such Restricted Share. 2. (a) A number of the Restricted Shares shall vest and become nonforfeitable on the following schedule: Number of Shares Vesting Date ---------------- ------------ 00,000 00-00-0000 (b) Unless the Committee shall otherwise determine, any Restricted Shares that are not vested upon termination of employment for any reason shall be forfeited, except as set forth in paragraph 3. 3. (a) If your employment with the Company terminates during the Restriction Period by reason of your death, Disability (as defined in Section 1(g) of the Employment Agreement between AT&T and you dated as of October 17, 1997 (the "Employment Agreement")), a Termination without Cause (as provided in Section 12(d) of the Employment Agreement) or a Constructive Termination without Cause (as defined in Section 1(f) of the Employment Agreement), all Restricted Shares shall vest upon such termination. (b) Upon termination of your employment for any reason other than as described in Paragraph 3(a) above, any Restricted Shares which have not then vested shall be forfeited. 4. Certificates evidencing the Restricted Shares shall be issued by the Company and registered in your name on the stock transfer books of the Company promptly after the date hereof, but shall remain in the physical custody of the Company or its designee at all times during the respective Restriction Period. As a condition to the receipt of this Restricted Stock Award, you shall deliver to the Company a stock power, duly endorsed in blank, relating to the Restricted Shares. 5. You shall be the record owner of the Restricted Shares until or unless such Shares are forfeited pursuant to paragraphs 2 and 3 hereof, and as the record owner you shall be entitled to all rights of a common shareholder of the Company, including, without limitation, voting rights and rights to cash and in-kind dividends, if any, on the Restricted Shares. As soon as practicable after termination of the respective Restriction Period, certificates for the Restricted Shares then vesting shall be delivered to you or to your legal representative along with the stock powers relating thereto. 6. At all times during the respective Restriction Period, the Restricted Shares shall be nontransferable, and may not be pledged, assigned or alienated in any way. 7. Notwithstanding any other provision of this Agreement, in the event of a Change in Control, as defined in the Employment Agreement, the respective Restriction Periods shall terminate and all Restricted Shares shall vest and become 100% nonforfeitable, and such termination and vesting shall be deemed to occur immediately prior to such Change in Control. 8. Neither the Plan nor this Restricted Share Award shall be construed as giving you the right to be retained in the employ of the Company or any Affiliate. 9. The Company shall have the right to deduct or cause to be deducted from or collect or cause to be collected with respect to, any distribution hereunder any federal, state, or local taxes required by law to be withheld or paid with respect to such distribution, and you or your legal representative or beneficiary shall be required to pay any such amounts. The Company shall have the right to take such action as may be necessary, in the Company's opinion, to satisfy such obligations. 10. You may, in accordance with procedures established by the Committee, designate one or more beneficiaries to receive all or part of any Restricted Shares to be distributed to you hereunder in case of your death, and you may change or revoke such designation at any time. In the event of your death, any Restricted Shares distributable to you hereunder that are subject to such a designation (to the extent such designation is valid and enforceable under applicable law) shall be distributed to such beneficiary or beneficiaries in accordance with this Agreement. Any other Restricted Shares distributable to you hereunder shall be distributable to your estate. If there shall be any question as to the legal right of any beneficiary to receive a distribution hereunder, the amount in question may be paid to your estate, in which event neither the Company nor any Affiliate shall have any further liability to anyone with respect to such amount. 11. Notwithstanding any provision of this Agreement to the contrary, this Award may be canceled, and the Restricted Shares forfeited, if you, without the Company's consent, become associated with, employed by or render services to, or own a interest in (other than as a shareholder with a nonsubstantial interest in such business), any business that is in competition with the Company or in competition with any business in which the Company has a substantial interest. The provisions of this paragraph 12 will be interpreted by the AT&T Management Committee in accordance with the AT&T Non-Competition Guideline (the "Guideline"), a summary of which has been given to you, and shall be effective to the extent not prohibited by applicable law. 12. The validity, construction and effect of this Agreement shall be determined in accordance with the laws of the State of New York and applicable Federal Law. Please indicate your acceptance of the terms hereof, and acknowledge that you have received copies of the Plan and the Guideline summary, in each case as currently in effect, by signing at the place provided and returning the original of this Agreement. Accepted and Agreed: AT&T Corp. By: - ----------------------------------- ----------------------------------- EXHIBIT D AT&T 1997 Long Term Incentive Program Restricted Stock Unit Award Agreement - -------------------------------------------------------------------------------- Name of Participant Social Security No. Date of Grant - -------------------------------------------------------------------------------- Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan. - -------------------------------------------------------------------------------- Pursuant to the Employment Agreement, dated October 17, 1997, between AT&T Corp. ("AT&T") and yourself (the "Employment Agreement") and to the AT&T 1997 Long Term Incentive Program (the "Plan"), a copy of which has been delivered to you, and in accordance with the terms and conditions of the Plan and the Employment Agreement and your agreement to the further terms, conditions and restrictions set forth below, you have been granted as of the date hereof 224,561 restricted stock units ("Restricted Stock Units" or "Units"). 1. The Restricted Stock Units shall vest and become payable in accordance with sections 2 and 3 hereof. The period beginning on the date hereof and ending on the day prior to the date on which any Unit becomes vested and payable in accordance with sections 2 and 3 (the "Vesting Date") is herein referred to as the "Restriction Period" with respect to any such Restricted Stock Unit. 2. The Restricted Stock Units shall vest and become nonforfeitable (subject to section 12) on October 1, 2003, provided that you are employed with AT&T on that date, and AT&T shall distribute to you (or your legal representative) a certificate representing 224,561 common shares of AT&T ("Shares") as soon as practicable thereafter. In the event that, on October 1, 2003, the Fair Market Value of such Shares is less than $10,000,000, you shall be entitled to a cash payment equal to the shortfall. 3. (a) In the event that, on or before April 1, 2002, a Change in Control occurs that is followed within three years thereafter by a "Second Trigger Event" (as defined below), then you shall be entitled (subject to section 12 and in lieu of any other benefit under this grant) to a cash payment as follows: (i) If such Second Trigger Event occurs on or after April 1, 1998 but before April 1, 1999, a cash payment equal to the greater of (a) the Fair Market Value, on the date of such Second Trigger Event, of 25% of the 224,561 Shares that underlie this grant and (b) $2,500,000. (ii) If such Second Trigger Event occurs on or after April 1, 1999 but before April 1, 2000, a cash payment equal to the greater of (a) the Fair Market Value, on the date of such Second Trigger Event, of 50% of the 224,561 Shares that underlie this grant and (b) $5,000,000. (iii) If such Second Trigger Event occurs on or after April 1, 2000 but before April 1, 2001, a cash payment equal to the greater of (a) the Fair Market Value, on the date of such Second Trigger Event, of 75% of the 224,561 Shares that underlie this grant and (b) $7,500,000. (iv) If such Second Trigger Event occurs on or after April 1, 2001, but before April 1, 2002, a cash payment equal to the greater of (a) the Fair Market Value, on the date of such Second Trigger Event, of 100% of the 224,561 Shares that underlie this grant and (b) $10,000,000. (b) In the event that you die while employed by the Company, unless a Second Trigger Event under section 3(a) has occurred, your beneficiaries or estate shall be entitled (subject to section 12 and in lieu of any other benefit under this grant) to a cash payment as follows: (i) If such death occurs before October 1, 1998, a cash payment equal to the greater of (a) the Fair Market Value, on the date of your death, of 20% of the 224,561 Shares that underlie this grant and (b) $2,000,000. (ii) If such death occurs on or after October 1, 1998 but before October 1, 1999, a cash payment equal to the greater of (a) the Fair Market Value, on the date of your death, of 40% of the 224,561 Shares that underlie this grant and (b) $4,000,000. (iii) If such death occurs on or after October 1, 1999 but before October 1, 2000, a cash payment equal to the greater of (a) the Fair Market Value, on the date of your death, of 60% of the 224,561 Shares that underlie this grant and (b) $6,000,000. (iv) If such death occurs on or after October 1, 2000 but before October 1, 2001, a cash payment equal to the greater of (a) the Fair Market Value, on the date of your death, of 80% of the 224,561 Shares that underlie this grant and (b) $8,000,000. (v) If such death occurs on or after October 1, 2001 but before October 1, 2003, a cash payment equal to the greater of (a) the Fair Market Value, on the date of your death, of 100% of the 224,561 Shares that underlie this grant and (b) $10,000,000. (c) For purposes of this section 3, "Second Trigger Event" shall mean any termination of your employment with AT&T without "Cause" (other than due to "Disability" or death), and any "Constructive Termination Without Cause," with the quoted terms having the meaning ascribed to them in the Employment Agreement. For purposes of this Award, termination of your employment with AT&T due to Disability shall be treated the same as for death under section 3(b) and any other provision of this Award. (d) Notwithstanding anything to the contrary in the Employment Agreement or the Plan, the Restricted Stock Units that are the subject of this grant shall vest and become nonforfeitable in connection with a Change in Control only to the extent provided in section 3(a). (e) If you retire on or after attaining age 62 at the request of AT&T, or voluntarily at any time with the consent of AT&T, you shall be treated as employed by AT&T on October 1, 2003, for purposes of section 2. (f) Upon termination of your employment for any reason other than as described above in this section 3 (including, without limitation, termination as a result of your employer ceasing to be either AT&T or an Affiliate), any Restricted Stock Units that are not vested shall be forfeited, unless the Committee shall otherwise determine in its sole discretion. 4. A cash payment in an amount equal to the dividend payable on one Share will be made to you for each Restricted Stock Unit held by you on the record date for such dividend that has not been forfeited, canceled or converted to a Share and distributed. 5. You may elect, in accordance with policies adopted by the Committee, to receive any payment to which you are entitled under this Agreement in the form of Shares rather than cash, such Shares to have a Fair Market Value on the date of distribution equivalent to the cash payment forgone. 6. You may irrevocably elect, in accordance with policies adopted by the Committee, to defer the distribution of all or any portion of any cash payment or Shares that you otherwise would have become entitled to receive pursuant to the terms of this Agreement. 7. At all times during the Restriction Period and any elected deferral period, the Units awarded hereunder shall be nontransferable, and may not be pledged, assigned or alienated in any way. 8. Transfer to or from AT&T and any Affiliate shall not be considered a termination of employment for purposes of this Agreement. Nor shall it be considered a termination of employment for purposes of this Agreement if you are placed on a military leave or other approved leave of absence, unless the Committee shall otherwise determine. 9. Neither the Plan nor this Restricted Stock Unit Award shall be construed as giving you the right to be retained in the employ of AT&T or any Affiliate. 10. AT&T shall have the right to deduct, to cause to be deducted from, or to collect with respect to, any distribution hereunder any federal, state, or local taxes required by law to be withheld or paid with respect to such distribution, and as may be necessary, in AT&T's opinion, to satisfy such obligations. 11. You may, in accordance with procedures established by the Committee, designate one or more beneficiaries to receive all or part of any distribution to be made hereunder in case of your death, and you may change or revoke such designation at any time. In the event of your death, any distribution hereunder that is subject to such a designation (to the extent such designation is valid and enforceable under applicable law) shall be made to such beneficiary or beneficiaries in accordance with this Agreement. Any other distribution hereunder shall be made to your estate. If there shall be any question as to the legal right of any beneficiary to receive a distribution hereunder, the amount in question may be paid to your estate, in which event neither AT&T nor any Affiliate shall have any further liability to anyone with respect to such amount. 12. (a) You recognize and acknowledge that you have had access to highly confidential and proprietary Company information and trade secrets; that the use, misappropriation or disclosure of such confidential information would constitute a breach of trust and could cause irreparable injury to AT&T; and that it is essential to the protection of AT&T's good will and to the maintenance of AT&T's competitive position that such confidential information be kept secret and that you not disclose such confidential information to others or use such confidential information to your own advantage or the advantage of others. You further recognize and acknowledge that it is essential for the proper protection of the business of AT&T that you be restrained (i) from soliciting or inducing any employee of AT&T to leave the employ of AT&T, (ii) from hiring or attempting to hire any employee of AT&T, (iii) from soliciting the trade of or trading with the customers and suppliers of AT&T for any business purpose, and (iv) from competing against AT&T following the termination of your employment with AT&T. You therefore agree that this grant will be forfeited and canceled immediately in its entirety (and that any benefit already paid out within 18 months prior to AT&T's notice of violation shall, at the discretion of AT&T, be repaid by you to AT&T within 10 business days of AT&T's written request) if you, during your employment or thereafter, engage in activity, which, in the sole discretion of AT&T, is deemed to be in conflict with or adverse to the interests of AT&T. Such adverse activity by you shall include, but is not limited to, the following: (i) becoming associated with, becoming employed by, rendering services to, or owning an interest in (other than as a shareholder with a nonsubstantial interest in such business) any business or enterprise that is engaged in competition with AT&T; (ii) recruiting, soliciting or inducing, any employee or employees of AT&T or of any affiliate of AT&T to terminate their employment with, or otherwise cease their relationship with, AT&T or any affiliate of AT&T; (iii) soliciting, diverting or taking away, or attempting to divert or to take away, the business or patronage of any of the clients, customers or accounts, or prospective clients, customers or accounts, which were contacted, solicited or served by those segments of AT&T that fell within, or related to, the scope of your responsibilities in Company positions you held during your employment with AT&T; (iv) using or disclosing the confidential information of AT&T; (v) initiating litigation against AT&T; (vi) criticizing, denigrating or otherwise speaking adversely against AT&T; and (vii) violating AT&T's Code of Conduct. (b) If any restriction set forth in this section 12 is found by any arbitrator or court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities or geographic areas as to which it may be enforceable. (c) The restrictions contained in this section 12 are necessary for the protection of the business and goodwill of AT&T and are considered by you to be reasonable for such purpose. Further, the restrictions set forth in this section 12 are of the essence of this grant, and shall be construed as independent of any other provision in this grant; and the existence of any claim or cause of action by you against AT&T, whether predicated on this grant or not, shall not constitute a defense to the enforcement by AT&T of these restrictions. (d) The terms and provisions in this section 12 shall be administered in accordance with the AT&T Non-Competition Guideline (the "Guideline"). 13. The validity, construction and effect of this Agreement shall be determined in accordance with the laws of the State of New York and applicable Federal law. - -------------------------------------------------------------------------------- Please indicate your acceptance of the terms in sections 1-13, and in particular the restrictions contained in section 12, hereof, and acknowledge that you have received copies of the Plan and the Guideline summary, in each case as currently in effect, by signing at the place provided and returning the original of this Agreement. ACCEPTED AND AGREED: - -------------------------------------------------------------------------------- SIGNATURE BY (AT&T Corp.) - -------------------------------------------------------------------------------- EXHIBIT E AT&T 1997 LONG TERM INCENTIVE PROGRAM NONSTATUTORY STOCK OPTION - -------------------------------------------------------------------------------- Name of Optionee Social Security No. Date of Grant - -------------------------------------------------------------------------------- Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan. - -------------------------------------------------------------------------------- Pursuant to the AT&T 1997 LONG TERM INCENTIVE PROGRAM (the "Plan") of AT&T Corp. ("AT&T"), a copy of which has been delivered to you, you have been granted as of the date hereof an option (the "Option") to purchase from AT&T 750,000 common shares of AT&T ("Shares") at the price of $44.53125 per Share, subject to the terms and conditions of the Plan and to your agreement to the additional terms and conditions set forth herein. 1. (a) Your right to exercise this Option shall expire ten (10) years from the date hereof, unless sooner terminated upon certain terminations of your employment as provided in (b) or (c) below or canceled as provided in (e) or section 2 below. (b) Upon your termination of employment by reason of death, Disability (as defined in section 1(g) of the Employment Agreement between you and AT&T dated as of October 17, 1997, (the "Employment Agreement")), Termination without Cause (as defined in section 12(d) of the Employment Agreement, a Constructive Termination without Cause (as defined in section 1(f) of the Employment Agreement) or on or after your retirement after reaching age 65, then you or your legal representative shall have the right to exercise any portion of this Option that is then outstanding, and any unvested portion of this Option shall immediately become exercisable, and remain exercisable, until the earlier of five years after the date of such termination of employment or the expiration of this Option. (c) Upon your termination of employment for any reason other than as described in (b) above (including your employer ceasing to be either an Affiliate or AT&T), any portion of this Option then outstanding which is unexercisable shall be cancelled and any portion which is then exercisable shall remain exercisable until the earlier of the ninetieth day after the date of termination or the originally scheduled expiration date of this Option unless the Committee determines otherwise. 2. (a) You recognize and acknowledge that you have had access to highly confidential and proprietary Company information and trade secrets and the use, misappropriation or disclosure of the confidential information would constitute a breach of trust and could cause irreparable injury to AT&T; and it is essential to the protection of AT&T's good will and to the maintenance of AT&T's competitive position that the confidential information be kept secret and that you not disclose the confidential information to others or use the confidential information to your own advantage or the advantage of others. You further recognize and acknowledge that it is essential for the proper protection of the business of AT&T that you be restrained (i) from soliciting or inducing any employee of AT&T to leave the employ of AT&T, (ii) from hiring or attempting to hire any employee of AT&T, (iii) from soliciting the trade of or trading with the customers and suppliers of AT&T for any business purpose, and (iv) from competing against AT&T following the termination of your employment with AT&T and therefore you agree that this Option will be forfeited and canceled immediately in its entirety (and any benefit already paid out within 18 months prior to AT&T's notice of violation shall, at the discretion of AT&T be required to be repaid to AT&T by you within 10 business days of AT&T's request in writing) if you, during your employment or thereafter, engage in activity, which, in the sole discretion of AT&T, is deemed to be in conflict with or adverse to the interests of AT&T. Such adverse activity by you shall include, but is not limited to, or own an interest in (other than as a shareholder with a nonsubstantial interest in such business) any business or enterprise that is engaged in competition with AT&T; or (ii) recruit, solicit or induce, or attempt to induce, any employee or employees of AT&T or any affiliate of AT&T to terminate their employment with, or otherwise cease their relationship with, AT&T or any affiliate of AT&T; or (iii) solicit, divert or take away, or attempt to divert or to take away, the business or patronage of any of the clients, customers or accounts, or prospective clients, customers or accounts, which were contacted, solicited or served by those segments of AT&T that fall within or relate to your scope of responsibilities in Company positions you held during your employment with AT&T; or (iv) use or disclose the confidential information; or (v) initiate litigation against AT&T; or (vi) criticize, denigrate or otherwise speak adversely against AT&T; or (vii) violate AT&T's Code of Conduct. (b) If any restriction set forth in this section 2 is found by any arbitrator or court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities or geographic areas as to which it may be enforceable. (c) The restrictions contained in this section 2 are necessary for the protection of the business and goodwill of AT&T and are considered by you to be reasonable for such purpose. Further, the restrictions set forth in this section 2 are of the essence of this Option, they shall be construed as independent of any other provision in this Option; and the existence of any claim or cause of action by you against AT&T, whether predicated on this Option or not, shall not constitute a defense to the enforcement by AT&T of these restrictions. (d) The terms and provisions in this section 2 shall be administered in accordance with the AT&T Non-Competition Guideline (the "Guideline"). 3. Except as provided in section 1 hereof, this Option may be exercised at any time prior to its expiration or cancellation as follows: one-third of the Shares may be purchased under the Option on the third anniversary of the date of grant; one-third of such Shares on or after the fourth anniversary of the date of grant; and the remaining one-third of such Shares on after the fifth anniversary of the date of grant. 4. This Option shall be exercised by delivering to AT&T written notice on a form to be provided for this purpose. The notice shall specify the number of Shares as to which the Option is being exercised (which number shall be at least fifty or the number of Shares that may then be exercised under this Option, whichever is less). The Option or any portion thereof may be exercised only upon payment of the exercise price thereof in full, and in accordance with procedures established by AT&T Board of Directors or the Committee. Payment shall be made in cash or in AT&T common shares or a combination of cash and AT&T common shares such that the total of the cash plus the Fair Market Value, as determined in accordance with procedures established by the Committee, of the AT&T common shares on the date of exercise at least equals the aggregate exercise price of the Shares as to which the Option is being exercised; provided, however, that any AT&T common shares surrendered as payment must have been owned by you at least six months prior to the date of exercise. Exercise of the Option shall take effect on the date the notice of exercise, in good order, is actually received at the address specified thereon, such date to be acknowledged to you in writing. 5. Within a reasonable period after the Option is exercised, AT&T will deliver to you or your legal representative a statement reflecting ownership of Shares in the form of book entry or certificates for the number of Shares with respect to which you exercised the Option. Neither you nor your legal representative shall be, or have any of the rights and privileges of, a shareowner of AT&T in respect of any shares purchasable upon the exercise of this Option, in whole or in part, unless and until certificates for such Shares shall have been issued. 6. (a) This Option is not transferable by you otherwise than by will or the laws of descent and distribution, and during your lifetime the Option may be exercised only by you or your guardian or legal representative if permitted by Section 422 and related sections of the Internal Revenue Code and any regulations promulgated thereunder. (b) You may, in accordance with procedures established by the Committee, designate one or more beneficiaries to receive all or part of the Option in case of your death, and you may change or revoke such designation at any time. In the event of your death, any portion of this Option that is subject to such a designation (to the extent such designation is valid and enforceable under applicable law) shall be distributed to such beneficiary or beneficiaries in accordance with this Agreement. Any other portion of this Option shall be distributable to your estate. If there shall be any question as to the legal right of any beneficiary to receive a distribution hereunder, the Shares in question may be purchased by and distributed to your estate, in which event neither AT&T nor any Affiliate shall have any further liability to anyone with respect to such Shares. 7. Notwithstanding any other provision of this Agreement, in the event of Change in Control, as defined in the Employment Agreement, any unvested portion of the Option shall immediately become exercisable. 8. Neither the Plan nor this Agreement shall be construed as giving you the right to be retained in the employ of AT&T nor any Affiliate. 9. If the Company shall determine, on advise of counsel, that the listing, registration or qualification of the Shares upon any securities exchange or under any state or federal law, or the consent or approval of any governmental or regulatory agency or authority, is necessary or desirable as a condition of, or in connection with , the exercise of the Option, no portion of the Option may be exercised until or unless such listing, registration, qualification, consent or approval shall have been effected or obtained. 10. Any determinations or decisions made or actions taken arising out of or in connection with the interpretation and administration of this Agreement and the Plan by the AT&T Board of Directors of the Committee shall be final and conclusive. 11. This Agreement may be amended by the AT&T Board of Directors or the Committee provided that no such amendment shall impair your rights hereunder without your consent. 12. AT&T may withhold or require you to pay any applicable withholding or other employment taxes due upon the exercise of this Option. You may elect to satisfy such withholding tax obligations by requesting that AT&T withhold Shares with a value equal to such tax obligations from the Shares otherwise deliverable upon the exercise of this Option. 13. The validity, construction and effect of this Agreement shall be determined in accordance with the laws of the State of New York and applicable Federal Law. - -------------------------------------------------------------------------------- Please indicate your acceptance of terms 1-13, and in particular the restrictions contained in section 2, hereof, and acknowledge that you have received copies of the Plan and the Guideline summary, in each case as currently in effect, by signing at the place provided and returning the original of this Agreement. ACCEPTED AND AGREED: - -------------------------------------------------------------------------------- SIGNATURE BY (AT&T Corp.) - -------------------------------------------------------------------------------- EXHIBIT F AT&T NON-COMPETITION GUIDELINE As approved effective August 1, 1986 AT&T NON-COMPETITION GUIDELINE TABLE OF CONTENTS SECTION 1. STATEMENT OF PURPOSE 1 SECTION 2. DEFINITIONS 1 SECTION 3. MANAGEMENT COMMITTEE 3 1. Membership 3 2. Responsibility and Authority 4 3. Conflict of Interest 5 SECTION 4. COMPETITIVE ACTIVITY 5 1. Limitation 5 2. Definition 6 SECTION 5. EVALUATION AND DETERMINATION OF COMPETITIVE ACTIVITY 7 1. Request for a Determination 7 2. Company's Right to Initiate an Evaluation 8 3. Evaluation 9 4. Conflict of Interest 10 5. Determination 10 6. Notice of Forfeiture 11 7. Opportunity to Withdraw 12 8. Reevaluation and Determination 13 9. Subsequent Competitive Activity 13 10. Consent to Compete 15 SECTION 6. GENERAL PROVISIONS 16 1. Guideline Modifications 16 2. Severability 16 3. No Intent to Prejudice Employees' Rights 16 SECTION 1. STATEMENT OF PURPOSE The purpose of this AT&T Non-Competition Guideline is to set uniform standards and establish administrative responsibilities and procedures for evaluating activity in possible violation of the non-competition clauses contained in various AT&T incentive and benefit plans. SECTION 2. DEFINITIONS 1. The word "Guideline" shall mean this AT&T Non-Competition Guideline. 2. The words "AT&T" or "Company" shall mean collectively the American Telephone and Telegraph Company, a New York corporation, all of its subsidiaries, related entities, lines of business and corporate successors and all business enterprises, including joint ventures, in which it is a partner or has a substantial ownership interest. 3. The term "Board of Directors" or "Board" shall mean the Board of Directors of the American Telephone and Telegraph Company. 4. The word "Committee" shall mean the AT&T Management Committee established and authorized by the Board to interpret and implement the standards and procedures of the Guideline. 5. The word "Plans" shall mean the AT&T Senior Management Long Term Incentive Plan, AT&T Senior Management Short Term Incentive Plan, AT&T 1984 Stock Option Plan, AT&T Non-Qualified Pension Plan, AT&T Senior Management Life Insurance Program, AT&T Senior Management Long Term Disability and Survivor Protection Plan, the AT&T Mid-Career Pension Plan, and any such other plans that my from time to time contain non-competition clauses or that the Board shall deem appropriate to make subject to the standards of this Guideline. 6. The word "benefit" shall mean any payment or entitlement to payment conferred pursuant to the terms of any or all of the Plans, regardless of how, when or in what form it is made or intended to be made. 7. The term "affected employee" shall mean an individual who, as a former or present employee, has received, is receiving or would be eligible to receive benefits under any of the Plans by virtue of his currently holding or, if a former employee, by virtue of his having held at the time of his termination of employment with the Company (i) a level higher than Division Level or equivalent fourth level or (ii) a position that the Board of Directors designates to be within the Senior Management Group. 8. The term "Senior Officer" shall mean an employee who has attained a level higher than Corporate Vice President or equivalent. 9. The phrase "non-competition clauses" shall mean those provisions, paragraphs, divisions or portions of the Plans which state in words or substance that an affected employee will forfeit and relinquish all entitlement to benefits if he engages in activity deemed to be in competition with the Company. 10. The use in this Guideline of personal pronouns of the masculine gender is intended to include both the masculine and feminine genders. 11. The use in this Guideline of singular or plural nouns is intended to have individual or collective meaning as applicable to the context as used therein and is in no way to be construed narrowly or such as to limit the scope of this Guideline or any of its provisions. SECTION 3. MANAGEMENT COMMITTEE 1. Membership. The Management Committee shall consist of the Senior Vice President-Personnel (or the corporate successor to that officer's responsibilities) and up to four other, but at no time less than two other, Senior Officers of the Company, such other Senior Officers to serve on a rotating basis terms of not less than one year. The Senior Vice President-Personnel shall serve as Chairman and Secretary of the Committee and shall have full authority to select and designate other Senior Officers to serve on the Committee, including the authority to select and designate Senior Officers to serve on an interim basis when regular Committee members are unavailable or are recused as described in Paragraph 3 of this Section 3. 2. Responsibility and Authority. Responsibility for interpreting and implementing the standards and provisions of this Guideline is vested solely and exclusively in the Committee, which is empowered to perform or to delegate, through and by its Chairman acting on its behalf, performance of all function necessary to fulfill its responsibilities in connection with the forfeiture of benefits, such functions explicitly to include, but which are not limited to, the following: seeking the advice and counsel and directing the participation of the heads of the Company's lines of business and any such other individuals as it deems necessary, at whatever intervals and for whatever function it deems appropriate ; making final determination that certain activity is or is not competitive activity and that the benefits of the affected employee who engages in such activity are or are not forfeited by such activity, respectively; directing or delegating the directing of whatever such Payroll, Benefit and other organizations of the Company as are affected to suspend or terminate payment of benefits or to refrain from initiating payments of benefits under any or all of the Plans to an affected employee who is found to be engaging in competitive activity or whose activity, in the case of the suspension of payment, is under evaluation; taking or delegating the taking of such legal steps as are necessary to recover benefits paid to an affected employee since the date on which he commenced engaging in activity deemed to be competitive activity; making such minor changes to this Guideline as may be required by law, by administrative efficiency or by changes in the Company structure; and acting on the Company's behalf and in its best interests in all matters relating to the issues covered by this Guideline. 3. Conflict of Interest. When a Senior Officer serving on the Committee is unable, for personal or professional reasons, to make a fair and objective determination of an affected employee's activity, then he shall recuse himself and shall not participate in the discussions concerning or in the final determination of appropriate action, in which case the Chairman of the Committee shall nominate and appoint another Senior Officer to substitute for the Senior Officer who has been recused, which substitute shall serve as a full member of the Committee and shall have all authority and responsibility thereto until full resolution off the matter has been accomplished. SECTION 4. COMPETITIVE ACTIVITY 1. Limitation. Notwithstanding the definitions and procedures contained in this Guideline, in all questions relating to whether certain activity of any affected employee or any business or any product or service of any business is or would be competitive with AT&T or whether such affected employee's activity is grounds for the Company's invoking any non-competition clause in any of the Plans and for terminating or preventing payment of benefits or recovering benefits already paid to such affected employee, the Committee, in its discretion and judgment, has sole authority to interpret the spirit and intent of the Guideline and of the non-competition clauses, and each and every decision of the Committee shall, with respect to all questions and matters relative to the subjects of forfeiture and competition, be final. 2. Definition. For purposes of the non-competition clauses as contained in the Company's Plans and subject to the limitation contained in Paragraph 1 of this Section 4, an affected employee's activity is competitive activity and any or all of his benefits under the Plans are subject to forfeiture to the fullest extent allowable by law if such affected employee either (A), as more fully described below, establishes a relationship with a competitor of the Company or (B) engages in activity which, in the Committee's discretion or judgment, is in conflict with or adverse to the interests of the Company. a. As used above in Paragraph 2 of this Section 4, the phrase "establishes a relationship with" shall mean, but shall not be limited to, founding, organizing, establishing, becoming associated with, becoming employed by, rendering services to, consulting or acting as consultant to, serving as director for, being a partner in or owning a substantial interest in, as shareholder or otherwise, such an interest to include, but not be limited to, for example, an interest subject to the reporting requirements of Section 13(d) of the Securities Exchange Act of 1934. b. As used above in Paragraph 2 of this Section 4, a "competitor of the Company" is a business, entity or enterprise which either (A) designs, develops, manufactures, produces, offers for sale or sells a product or service which can be used as a substitute for, performs substantially the same function as, is a practical alternative for or is generally intended to satisfy the same customer or client needs for any product or service designed, developed, manufactured, produced, offered for sale or sold by the Company, or (B) is a business or activity which the Committee, based upon review of the individual facts and circumstances and in its discretion and judgment, determines, in order to protect the best interests of the Company, to be a competitor within the spirit and intent of the Guideline and the non-competition clauses. SECTION 5. EVALUATION AND DETERMINATION OF COMPETITIVE ACTIVITY 1. Request for a Determination. An affected employee who is considering engaging in an activity which an individual would reasonably believe to be competitive activity as that term is used and defined in this Guideline and which thus may be grounds for the Company's invoking the non-competition clauses of the Plans should request, prior to engaging in such activity, that it be evaluated as described in this Section 5 of the Guideline and that a determination be made and an opinion rendered as to whether such activity is deemed to violate such non-competition clauses. Such affected employee's request may be made to the Director, Executive Personnel Matters, who, as the Committee's delegate in correspondence and administrative functions, will coordinate evaluation of the activity. To insure that the valuation and determination are based on all relevant facts and circumstances and thus are consistent with the spirit and intent of this Guideline, such affected employee should accompany his request with a full explanation in writing of whatever information he deems pertinent as well as of a description of the contemplated activity, such explanation to include, but not to be limited to, (A) his contemplated relationship, including, as applicable, his proposed position, title, responsibilities and the nature and extent of his ownership interest, (B) the nature of the business, including, for example, all products and/or services currently being or expected to be designed, developed, manufacturing, produced, offered for sale and sold by the business and (C) the most recently available financial information on the business. 2. Company's Right to Initiate an Evaluation. The Company reserves the right to initiate an evaluation of any activity of an affected employee which may be competitive activity as that phrase is used and defined in this Guideline. Upon receipt of a request from or on behalf of the head of any of the Company's lines of business, from the Board, from the Committee or from any Senior Officer, the Director, Executive Personnel Matters, shall notify the affected employee in writing that such an evaluation has been initiated and that he has the opportunity to submit in writing for consideration by the Committee whatever information he deems pertinent to its determination, including, but not limited to, a full explanation of the activity as described above in Divisions (A) through (C), inclusive, of Paragraph 1 of this Section 5. 3. Evaluation. Whether an affected employee's contemplated or actual activity is or is not competitive activity within the scope and intent of the non-competition clauses shall be separately evaluated by the head and by an attorney serving as counsel to the head of each of the Company's lines of business responsible for the design, development, manufacture, production, offer for sale or sale of the product or service with which such activity is suspected to be in competition, by the head of each entity responsible for paying benefits under any of the affected Plans or his delegate, by a Corporate Vice President-Law of the Company and, in addition, by such other individuals as the Committee may designate as appropriate. Such evaluations are to be based upon information submitted by the affected employee (including his position and responsibilities), the financial state of the line of business, the competitive marketplace, the extent to which the activity is adverse to the Company, the impact on the affected employee's line of business and any other facts and circumstances deemed relevant under the standards of this Guideline. After such evaluations, each head and his counsel of each such line of business, each head of each such entity or his delegate, the Corporate Vice President-Law and each of any such other specially-designated individuals as described above shall provide to the Committee in writing his independent recommendation as to its determination, which recommendation shall identify, if applicable, any fact or circumstance not readily apparent from the affected employee's submittal or not generally known but upon which fact or circumstance the recommendation was based. 4. Conflict of Interest. When an individual who, under the standards of this Guideline, is to evaluate an affected employee's activity but is unable, for personal or professional reasons, to make in that instance a fair and objective evaluation, then he shall recuse himself and shall not evaluate the activity nor make a recommendation to the Committee nor participate in any way in the resolution of the matter; provided, however, that at the express direction of the Chairman he can participate, in which case, the conflict of interest shall be duly noted and taken into consideration when weighing his involvement. An individual who recuses himself from evaluating activity shall designate the individual in his line of business, entity or another Corporate Vice President-Law, as appropriate, who shall evaluate the activity and make a recommendation as his delegate. 5. Determination. Final determination of whether an affected employee's activity is or is not competitive activity and thus whether his benefits are or are not, respectively, subject to forfeiture shall be made by the Committee and the Committee alone, and such final determination shall be based on the recommendations as described above in Paragraphs 3 and 4 of this Section 5 as well as on such other facts and circumstances as the Committee deems pertinent. No single recommendation nor any or all of the recommendations in the aggregate shall be binding or conclusive on the Committee in making its determination. After the Committee's determination, the Director, Executive Personnel Matters, shall notify the affected employee in writing of the decision of the Committee. If the Committee's determination is that an affected employee's activity is not or would not be competitive activity, the Committee reserves the right to seek, at whatever intervals it deems appropriate, written assurance from the affected employee that the facts and circumstances upon which the activity was evaluated and the determination based have not changed. 6. Notice of Forfeiture. If, after activity has been evaluated and recommendations submitted as described above in Paragraph 3 of this Section 5, the Committee determines that contemplated activity would be competitive activity, the Director, Executive Personnel Matters, will notify the affected employee in writing of the Committee's determination and advise such affected employee that his benefits are at risk of forfeiture. An affected employee who receives such notice and advice shall, within thirty business days of the date of such notice and advice, provide the Company with written assurance that he has not engaged and will not engage in such contemplated activity. If, after the expiration of the thirty business day period, the Director, Executive Personnel Matters, has not received such assurance, he shall so advise the Committee and shall notify the appropriate Payroll and Benefit organizations to terminate immediately or not to initiate payments of benefits to the affected employee. If the Committee's determination is that an affected employee is currently engaging in competitive activity, the Director, Executive Personnel Matters, upon receipt of notice of such determination from the Chairman of the Committee shall so advise the affected employee, shall also if so authorized by the Chairman direct the appropriate Payroll, Benefit and other affected organizations of the Company to terminate immediately payments of benefits to the affected employee and, in addition, may at the Committee's express direction take such legal steps as are necessary to recover from the affected employee all benefits paid by the Company or on its behalf since the date when such competitive activity is deemed to have commenced. 7. Opportunity to Withdraw. If, after activity has been evaluated and recommendations submitted as described above in Paragraphs 3 and 4 of this Section 5, the Committee determines that there are unusual or special circumstances which mitigate against withdrawal of benefits from or denial of benefits to an affected employee who is and has been engaging in activity which is competitive activity within the spirit and intent of the non-competition clauses, the Committee may, in its discretion and judgment, withhold termination of benefits and offer the affected employee in writing the opportunity to withdraw from the competitive activity; provided, however, that any affected employee who is the recipient of and accepts such an offer shall provide the Committee, within a reasonable time of the date of such offer as prescribed by the Committee, written assurance that such withdrawal has been accomplished, or such offer shall lapse and a final determination and termination of benefits be ordered. 8. Reevaluation and Determination. Notwithstanding prior evaluations and regardless of a previous determination by the Committee as described in this Guideline, the Company reserves the right, without prior notice to the affected employee, to institute a reevaluation of his activity if, in the Committee's discretion and judgment, it believes that under the facts and circumstances such reevaluation is warranted. In case of such reevaluation, the affected employee shall be notified by the Director, Executive Personnel Matters, that such reevaluation has been instituted and shall have the opportunity to submit in writing for consideration by the Committee a full explanation of whatever information he deems pertinent to the Committee's redetermination, such explanation to include, but not to be limited to, a full explanation of the activity as described above in Divisions (A) through (C), inclusive, of Paragraph 1 of this Section 5. After such reevaluation, there shall be a determination substantively and procedurally consistent with that described above in Paragraph 5 of this Section 5. 9. Subsequent Competitive Activity. If an affected employee commences engaging in activity which is not at the time of commencement considered competitive activity as that phrase is used and defined in this Guideline but within a reasonable period of time thereafter )such period, under ordinary circumstances and unless the Committee determines otherwise, to be three years) the activity becomes competitive activity as that phrase is used and defined in this Guideline, then the affected employee so engaging in such competitive activity should advise the Director, Executive Personnel Matters. Upon receipt of such advice, the Director, Executive Personnel Matters, shall then offer such affected employee the opportunity to withdraw without forfeiture of benefits under the term of and consistent with the provisions of such an opportunity as described in Paragraph 7 of this Section 5. If an affected employee engages in subsequent competitive activity in a situation such as that described in the first sentence of this Paragraph 9 of this Section 5 but such affected employee fails to come forward and so advise the Company, then, notwithstanding anything herein to the contrary, after evaluation or reevaluation and determination as described above in Paragraphs 2, 3, 5 and 8 of this Section 5, benefits to such affected employee shall be immediately terminated and the Company may take such steps as are necessary to recover any benefits paid since the date on which such activity became competitive. If an affected employee commences engaging in activity which is not at the time of commencement competitive with AT&T as that phrase is used and defined in this Guideline but, subsequent thereto, AT&T designs, develops, manufactures, produces, offers for sale or sells a product or service such as to render the activity competitive, no question of forfeiture arises; provided, however, that, if the affected employee, knew or had reason to know at the time he commenced the activity that AT&T intended to design, develop, manufacture, produce, offer for sale or sell such product or service, then the Company may invoke the non-competition clauses. 10. Consent to Compete. In extraordinary circumstances and notwithstanding that an affected employee's competitive activity would, under the provisions of the Guideline, be grounds for invoking the non-competition clauses and terminating payment of benefits to such affected employee, the Committee may consent to an affected employee's engaging in such activity if, in its discretion and judgment, the Committee determines that, despite such activity's technical isolation, the facts are overwhelmingly compelling or it is otherwise in the Company's best interest that relief from application of the non-competition clauses is warranted. In such a case the Director, Executive Personnel Matters, shall notify the affected employee of such consent; provided, however, that, despite such consent, the Company reserve the right to withdraw such consent and to invoke the non-competition clauses within a reasonable period of time thereafter (such period, under ordinary circumstances and unless the Committee determines otherwise, to be three years) and without prior notice if and when, in the Committee's discretion and judgment, the facts and circumstances warrant it. SECTION 6. GENERAL PROVISIONS 1. Guideline Modifications. The Committee, in its discretion and judgment and without notice, may from time to time make such minor changes in the Guideline as it deems required by law, by administrative efficiency or by change in the Company structure. 2. Severability. To the extent that one or more of the provisions of this Guideline may be found to be unenforceable in any federal or state jurisdiction, such provisions are intended and are declared to be severable from the whole, and such a judgment shall not jeopardize the enforceability of the balance of the Guideline. 3. No Intent to Prejudice Employees' Rights. No act of the Company, the Board, the Committee or any Senior Officer or employee of the Company acting in connection with the design, approval, interpretation or implementation of this Guideline or any of its standards, provisions or procedures is in any way intended to interfere with or prejudice any individual's right to consider, accept, continue or terminate employment, to engage in any activity or to establish any kind of business relationship or ownership interest with any enterprise. EXHIBIT G AGREEMENT AND RELEASE This AGREEMENT is made this _____ day of September 1997 by and between AT&T Corp., (hereinafter "Company" or "AT&T") and ________________ (hereinafter "Employee"). WHEREAS, Employee has been employed by AT&T since _____________; and WHEREAS, Employee and the Company have decided to settle fully and finally all obligations related to Employee's employment and resignation from the Company. NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, the parties agree as follows: 1. Employee will resign his active employment with the Company on or before ____________________, this date or such later resignation date under Paragraph 8, hereinafter "Resignation Date". 2. Should Employee die after executing this Agreement but before the intended Resignation Date, this Agreement shall be null and void in its entirety. 3. As special consideration for this Agreement, the Company will pay the Employee a Severance Benefit in the amount of ________________________ (______________). Such Severance Benefit will be paid to the Employee in _______ monthly installments beginning the month after the month which includes Employee's Resignation Date and will be less legally required deductions for applicable taxes. 4. Except as provided in Paragraphs 3 and 4 of this Agreement, Employee hereby waives any and all claims to salary, incentives, payments, or benefits of any kind, including, but not limited to, any entitlements Employee may have under his Employment Agreement with the Company signed and dated by Employee on ________________ and any amendments thereto, other than: a. Employee and/or his survivors, will receive payout of previously deferred incentive plan awards made under the AT&T Senior Management Incentive Award Deferral Plan in accordance with Employee's elected payout schedules and with the terms and conditions of such plan, and b. Those payments and other benefits shown in Appendix A. 5. Except as required by law or valid legal process, Employee shall not disclose or discuss, other than with legal counsel, personal tax or financial advisors, or members of Employee's immediate family, any facts concerning the negotiation, execution or implementation of this Agreement. Moreover, Employee specifically agrees that he will not criticize, denigrate or otherwise speak adversely or originate, disclose or otherwise be the source of any negative information about the operations, management or performance of the Company, affiliates of the Company, or about any director, officer, employee or agent of any of the foregoing; or the circumstances related to his resignation, other than to state that Employee was __________________________ and that he resigned voluntarily to pursue other opportunities. 6. Employee specifically covenants that: a. he will not for 18 months from the Resignation Date, recruit, solicit or induce, attempt to induce or cause to induce, any employee or employees of the Company to terminate their employment with, or otherwise cease their relationship with the Company. b. The Severance Benefit in Paragraph 3 is conditioned upon Employee adhering to and not violating the AT&T Non- Competition Guideline (a summary is attached as Appendix B). Such Guideline, in addition to Non-Competition constraints includes a provision which calls for forfeiture of benefits in the event Employee engages in activities in conflict with or adverse to the interest of the Company. c. The Employee recognizes and acknowledges that the Company considers its confidential and proprietary information and trade secrets to be among its most valuable assets, including, but not limited to, its customer and vendor lists, databases, computer programs, frameworks, models, its marketing programs, its sales, financial, marketing, training and technical information, and any other information, whether communicated orally, electronically, in writing or in other tangible forms concerning how AT&T creates, develops or maintains its products, services and its marketing plans, targets its potential customers and operates its business. The parties to this Agreement recognize that AT&T has invested, and continues to invest, considerable amounts of time and money in obtaining and developing the goodwill of its customers, its other external relationships, its data systems and data bases, and all the proprietary and other information described above (hereinafter collectively referred to as "AT&T Confidential Information"), that it is essential to the protection of AT&T's goodwill and to the maintenance of AT&T's competitive position and that AT&T Confidential Information be kept secret and that Employee not disclose AT&T Confidential Information to others or use AT&T Confidential Information to Employee's own advantage or the advantage of others, and agrees that any misappropriation or unauthorized disclosure of AT&T Confidential Information (including trade secrets) in any form would irreparably harm AT&T. (Such AT&T Confidential Information does not include any publicly available material.) Employee affirms his obligation to keep secret all AT&T Confidential Information and that he will not disclose it to any third party in the future. d. Employee acknowledges that the restrictions set forth in this Paragraph 6 are necessary and reasonable to prevent the use and disclosure of AT&T Confidential Information and to otherwise protect the legitimate business interests of the Company. Employee further acknowledges that when Employee's employment with AT&T terminates, he will be able to earn a livelihood without violating any of the foregoing restrictions. 7. Employee acknowledges that remedies at law, and those remedies contained in Paragraph 11, for any breach by Employee of the provisions of Paragraphs 5 and 6 will be inadequate and that the Company shall be entitled to injunctive relief against Employee in the event of any such breach. This Release is in addition to any other remedy and damages available. Employee acknowledges that the restrictions contained therein are reasonable, but agrees that if any court of competent jurisdiction shall hold such restrictions unreasonable as to time, geographic area, activities, or otherwise, such restrictions shall be deemed to be reduced to the extent necessary in the opinion of such court to make them reasonable. The Company's waiver, or failure to seek enforcement or remedy for a breach or suspected breach of any provision of this Agreement in a particular instance shall not be deemed a waiver of such provision in the future. In addition, such waiver or failure to act with respect to one provision, shall not be deemed to be a waiver of any other provision of this Agreement. 8. If Employee becomes disabled after executing this Agreement, but before ___________________, and if he is receiving or entitled to receive sickness or accident disability benefit payments from the Company as of ____________________, then: a. Should Employee die while disabled and receiving sickness or accident benefit payments, this Agreement shall be null and void in its entirety; OR b. Should Employee's period of disability be determined by the Company to terminate prior to the expiration of the period during which in accordance with the terms of the Sickness and Accident Disability Benefit Plan, he could become entitled to receive sickness and accident disability benefit payments, Employee will resign his active employment with the Company effective on the day following the last day of disability for which he receives such payments (hereinafter his "actual resignation date"); further, Employee understands and agrees that, in such event, the total amount of the payment specified in Paragraph 3 above shall be reduced by the total amount of sickness or accident disability benefit payments which he has received from the Company for the period of disability after his intended resignation date, i.e., ___________________ to his actual resignation date inclusive and shall be paid out in accordance with Paragraph 3 above OR c. Should Employee be determined by the Company to continue to be disabled at the expiration of the period during which he is entitled to receive sickness or accident disability benefit payments, Employee understands and agrees that he will thereupon be retired by action of the Company's Benefit Committee, effective on the day following the last day of eligibility for such sickness or accident disability payments (hereafter his "actual resignation date") and that, under such circumstances, the total amount of the payment specified in Paragraph 3 above shall be reduced by the total amount of sickness or accident disability benefit payments which he has received from the Company for the period of disability after his intended resignation date, i.e., from ____________________ to his actual resignation date inclusive and shall be paid out in accordance with Paragraph 3 above. 9. The Employee agrees that he will submit all vouchers for reasonable business expenses prior to his Resignation Date or as soon thereafter as is practicable. The Employee understands and agrees that after his Resignation Date he will no longer be authorized to incur any expenses, obligations or liabilities on behalf of the Company. 10. In accordance with his existing and continuing obligations to the Company, Employee agrees to return to the Company, on or before his Resignation Date, all Company property or copies thereof, including, but not limited to, files, records, computer access codes, computer programs, instruction manuals, documents, business plans and other property which he received or prepared or helped to prepare in connection with his employment with the Company, and to assign to the Company all right, title and interest in such property, and any other inventions, discoveries or works of authorship created by Employee during the course of his employment. 11. Employee understands and agrees that a violation of any portion of Paragraphs 5, 6, or 10, relating to the negotiation of the Agreement, disclosure of adverse information about the Company, recruiting employees of the Company, violation of the AT&T Non-Competition Guideline, the return of Company property, (except the Company car if Employee elects to purchase such vehicle), and the use or disclosure of AT&T Confidential Information, will be considered a material breach of this Agreement, for which Employee will forfeit all benefits (other than tax qualified welfare and retirement plan benefits) as well as any monies not already paid under this Agreement and/or be obligated to return immediately all monies which have already been paid under this Agreement - except $1,000.00. The provisions of this Paragraph 11 in no way limit the Company's right to also commence an action for damages and/or pursue other legal or equitable remedies in the event Employee breaches any provision of this Agreement. In the event that the Company takes such action, all of Employee's other obligations under this Agreement shall remain in full force and effect. 12. Employee acknowledges that there are various state local and federal laws that prohibit employment discrimination on the basis of age, sex, race, color, national origin, religion, disability, sexual orientation or veteran status and that these laws are enforced through the Equal Employment Opportunity Commission, Department of Labor and State or Local Human Rights agencies. Such laws include, without limitation, Title VII of the Civil Rights Act of 1964 as amended 42 U.S.C. Sec. 2000 et. seq.; the Age Discrimination in Employment Act, 29 U.S.C. Sec. 621 et. seq.; the Americans with Disabilities Act, 42 U.S.C. Sec. 12101; the Employee Retirement Income Security Act, as amended 29 U.S.C. Sec. 1001 et. seq.; and 42 U.S.C. Section 1981, the New Jersey Conscientious Employee Protection Act, the New Jersey Law Against Discrimination and other state and local human or civil rights laws as well as other statutes which regulate employment; and the common law of contracts and torts. In consideration of this Agreement, Employee hereby waives and releases any rights he may have under these laws as to events which have occurred prior to the date of this Agreement or Resignation Date, whichever is later. Employee acknowledges that the Company has not (a) discriminated against him, (b) breached any contract with him (c) committed any cruel wrong (tort) against him or (d) otherwise acted unlawfully toward him. Employee, also waives any right to become, and promises not to consent to become, a member of any class in a case in which claims are asserted against any Releasee that is related in any way to his employment or the termination of his employment with AT&T, and that involve events which have occurred as of the date of this Agreement or Resignation Date. If Employee, without his prior knowledge and consent is made a member of a class in any proceeding, he shall opt out of the class at the first opportunity afforded to him after learning of his inclusion. In this regard Employee agrees that he will execute, without objection or delay, an "opt-out" form presented to him either by the court in which such proceeding is pending or by counsel for any Releasee who is made a defendant in any such proceeding. 13. Employee, on behalf of himself, his heirs, executors, administrators, successors and assigns, releases and discharges the Company and its successors, assigns, subsidiaries, affiliates, directors, officers, representatives, agents and employees ("Releasees") from any and all claims, including claims for attorney's fees and costs, charges, actions and causes of action, including but not limited to those with respect to his employment or termination of employment with the Company, as well as from all claims for personal injury, actual or potential, to the date of this Agreement or Employee's Resignation Date, whichever is later. This includes, but is not limited to, claims arising under federal, state, or local laws prohibiting age, sex, race or any other forms of discrimination such as the Age Discrimination in Employment Act, claims arising under the New Jersey Conscientious Employee Protection Act and the New Jersey Law Against Discrimination, and claims growing out of any legal restrictions on the Company's right to terminate its employees. This also includes claims based on theories of contract or tort, whether arising out of common law or otherwise. Employee represents that he has not filed any charge or lawsuit against the Company with any governmental agency or Court and that he will not institute any actions against the Company or any Releasee for any reason. With respect to any administrative charges that have been or may be filed concerning events or actions relating to his employment or the termination of his employment that occurred on or before Resignation Date, Employee waives and releases any right he may have to recover in any lawsuit or proceeding brought by him or by an Administrative Agency on his behalf. If Employee breaches this Paragraph, Employee understands that he will be liable for all expenses, including costs and reasonable attorney's fees, incurred by any Releasee in defending the lawsuit or charge of discrimination. Employee agrees to pay such expenses within thirty (30) calendar days of written demand. This Paragraph is not intended to limit Employee from instituting legal action for the sole purpose of enforcing this Agreement. 14. Except to the extent expressly provided herein, nothing in this Agreement shall be deemed to alter, amend, modify or otherwise affect any employee benefit, compensation or other plan, program or policy maintained by the Company or any provision thereof. 15. If any provision, or portion thereof, of this Agreement is determined to be invalid under applicable statute or rule of law, only such provision, and only to the extent determined to be invalid, shall be deemed omitted from this Agreement, the remainder of which shall remain fully in force and effect. 16. The construction, interpretation and performance of this Agreement shall be governed by the laws of the State of New Jersey without regard to its Conflict of Laws principles. 17. Employee understands that, pursuant to the Older Workers Benefit Protection Act of 1990, he has the right to consult with an attorney before signing this Agreement, he has 21 days to consider the Agreement before signing it and he may revoke the Agreement within seven (7) calendar days after signing it. Employee further understands that the Agreement will not become effective or enforceable until the seven day revocation period has expired. 18. Employee promises and agrees that in consideration of a payment of one thousand dollars ($1,000) to be made within ten business days subsequent to his Resignation Date, in addition to the benefits set forth in Paragraph 3 and 4, Employee will execute a release of all claims relating to his employment during the period from the execution of this Agreement to his Resignation Date. A copy of such release is attached as Appendix C to this Agreement. 19. This Agreement, consisting of _______ pages containing _______ paragraphs and three Appendices constitutes the entire agreement between the Company and Employee with respect to the subject matter hereof and shall not be amended, modified, or amplified without specific written provision to that effect, signed by both parties. No oral statement of any person whosoever shall, in any manner or degree, modify or otherwise affect the terms and provisions of this Agreement. Accordingly, this Agreement supersedes and completely replaces any prior oral or written communication on this subject. By signing this Agreement, Employee states that; a) He has read it and has had sufficient time to consider its terms; b) He understands it and knows that he is giving up important rights; c) He agrees with everything in it; d) He is aware of his right to consult an attorney before signing it; and has been so advised e) He has signed it knowingly and voluntarily. Witnesses: ___________________________ ___________________________ ________________ Employee Date ___________________________ ___________________________ ________________ For the Company Date THIS IS A LEGAL AGREEMENT, RELEASE AND COVENANT NOT TO SUE READ CAREFULLY BEFORE SIGNING Appendix A Item Treatment a) Base Salary Employee receives base salary through Resignation Date. b) Employee Benefits and Senior Employee will be covered under general Management Benefits (except employee benefit plans and Senior as otherwise noted below) Management benefit and perquisite plans/programs and practices through Resignation Date. c) Medical/Dental/Vision(After Company paid Medical/Dental/Vision will Resignation Date) continue through the Resignation Date. Under COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985), coverage can be continued at Employee's expense for lesser of 18 months or until Employee becomes eligible for coverage under another employer's plan. d) AT&T Senior Management Coverage will cease on Resignation Date. Individual Life Insurance Employee may assume policy if he so Program (AT&T SMILIP) elects by paying 100% of premium. (After Resignation Date) Company premium contributions to policy cease on Resignation Date and Company will withdraw all prior premium contributions. e) Supplemental Variable Universal Employee, via insurance carrier, will be Life Insurance given the option to continue coverage on an individual basis. Appendix B AT&T Non-Competition Guideline Summary Introduction In order to protect the interests of the Company, its shareholders, its employees and its customers, AT&T requires that an employee who is eligible to receive benefits under various Senior Management incentive and compensation plans forfeit those benefits if he or she competes with the Company after termination of employment. The standard used to determine "competing" and an explanation of the administrative process used to evaluate activity are described in full in the AT&T Non-Competition Guideline, which has been approved by the AT&T Board of Directors. This brochure summarizes the Guideline and is intended as a reference guide only. A copy of the complete Guideline may be obtained by requesting a copy from the Director, Executive Human Resources, AT&T Corporate Headquarters. General Information Responsibility for interpreting, administering and implementing the provisions of the Guideline rests with the AT&T Management Committee, which was established and authorized by the Board to resolve all questions and handle all matters in connection with competition and forfeiture of benefits. At least three, but no more than five, Senior Officers serve on the Committee. The Committee may make minor changes in the Guideline and to those incentive and compensation plans which are subject to the Guideline's procedures. Changes may be made without notice whenever the Committee considers the changes necessary to fairly and consistently administer the Guideline and to protect the Company's interests. The Committee's decisions about forfeiture of benefits and what is competitive activity are final. No act of the Company, the Committee or any employee acting in connection with the Guideline and its provisions is in any way intended to interfere with any individual's right to consider, accept, continue or terminate employment to engage in any activity or to establish any kind of business or ownership interest with any enterprise. Forfeitable Benefits Under the terms of the following plans, the benefits they pay are forfeitable (or immediately payable): AT&T Senior Management Short Term Incentive Plan, AT&T Senior Management Long Term Incentive Plan, AT&T 1984 Stock Option Plan, AT&T Non-Qualified Pension Plan, AT&T Senior Management Life Insurance Program, AT&T Senior Management Long Term Disability and Survivor Protection Plan, AT&T Senior Management Individual Life Insurance Program, AT&T Incentive Award Deferral Plan, AT&T Deferred Compensation Plan for Non-Employee Directors, A&T Senior Management Financial Counseling Program, and the AT&T Mid-Career Pension Plan. The Board or Committee may make other plans subject to this Guideline. . the contemplated relationship, including (as applicable) the proposed position, title, responsibilities and the nature and extent of the ownership interest; . the nature of the business, including, for example, all products and/or services currently being or expected to be designed, developed, manufactured, produced, offered for sale or sold by the business; and . the most recently available financial information on the business The Company has the right to initiate an evaluation of an individual's activity. An evaluation will be instituted when it is requested by or on behalf of the head of any of the Company's lines of business or a member of the Board or the Committee. The Director, Executive Human Resources, will notify the individual in writing that an evaluation has been initiated and of the opportunity to submit within a stated period of time information for the evaluators' and the Committee's consideration. An individual whose activity is being evaluated is strongly encouraged to provide the Committee with a written submittal such as that described above. An individual's contemplated or actual activity will be separately evaluated by . the head and an attorney serving as counsel to the head of each of the Company's lines of business responsible for the design, development, manufacture, production, offer for sale or sale of the product or service with which the activity is suspected to be in competition; . the head of each entity responsible for paying benefits under any of the Plans listed above, or a delegate; . A Corporate Vice President-Law of the Company; and . any other individuals whose evaluations the Committee designates as appropriate. Individuals who, for personal or professional reasons, have a conflict of interest which they feel would prevent their fair and objective evaluation will not participate but will delegate their responsibility to another in their line of business or organization. Evaluations will be based on the individual's submittal, the financial state of the line of business, the competitive marketplace, the impact of the individual's leaving on his or her line of business, the extent to which activity is adverse to the Company's interests and all other relevant facts and circumstances. After evaluating the activity, each person doing an evaluation will make to the Committee a recommendation of appropriate action, identifying, if there are any, those facts or circumstances not readily apparent form the submittal or not generally known but upon which facts or circumstances the recommendation was based. Reevaluation Even though activity has been previously evaluated and regardless of a prior determination, the Company reserves the right without prior notice to reevaluate activity if the Committee believes it is warranted. In case of a reevaluation, the individual will be advised by the Director, Executive Human Resources, that a reevaluation has been instituted and that he or she has the opportunity to make a submittal such as that described above. Subsequent Competitive Activity If an individual establishes a relationship with a business which is not at that time a competitor of the Company, but AT&T later engages in a line of business which is competitive with any such product and/or service of the business, no question of forfeiture arises. However, the Company may require forfeiture if the person knew (or had reason to know) at the time the relationship was established that AT&T intended to design, develop, manufacture, produce, offer for sale or sell a competitive product or service. The Company may also invoke forfeiture if, within a reasonable time-normally three years- after the individual engages in an activity, it becomes adverse to AT&T's interests or competitive with AT&T. In such case, if the person advises the Director, Executive Human Resources, that the activity may have become competitive, he or she will have the opportunity to withdraw as described above, without forfeiture. If the Company is not advised, or if the withdrawal is not accomplished within the stated time, then all benefits paid after the point when the activity became competitive are forfeitable. Consent to Compete In very extraordinary circumstances and despite the fact that an individual's competitive activity would be grounds for requiring forfeiture of benefits, the Company may consent to the activity if the Committee determines that the situation is only technically competitive and the facts are overwhelmingly compelling that relief is warranted. In such a case, the Director, Executive Human Resources, will provide a letter advising the individual of the Company's decision. However, the Company does not waive by such consent the right to withdraw the consent after it is issued, without prior notice, and to invoke the non-competition clauses if, within a reasonable time-normally three years-thereafter, the facts and circumstances change and it becomes in the Company's best interest to require forfeiture. Affected Individuals An individual whether a present or former employee, is subject to the Guideline and to having activity evaluated if he or she has received, is receiving or is entitled to receive benefits according to any of the Plans listed above. What is Competitive Activity An individual's activity is competitive activity and his or her benefits are forfeitable if that individual either (A) engages in activity in conflict with or adverse to the interests of the Company or (B) establishes a relationship with a competitor of the Company. "Establishing a relationship" includes founding, organizing, establishing, becoming associated with, becoming employed by, rendering services to, consulting or acting as consultant to, being a partner in or owning a substantial interest in as shareholder or otherwise (such as, for example, an interest subject to the reporting requirements of Section 13(d) of the Securities Exchange Act of 1934). A "competitor of the Company" is a business, entity or enterprise which either (A) designs, develops, manufactures, produces, offers for sale or sells a product or service which can be used as a substitute for, performs substantially the same function as, is a practical alternative for or is generally intended to satisfy the same customer or client needs for any product or service designed, developed, manufactured, produced, offered for sale or sold by the Company or (B) is a business which the Committee, based upon review of the individual facts and circumstances and in its discretion and judgment, determines, in order to protect the best interests of the Company, to be a competitor within the spirit and intent of the Guideline and the non-competition clauses of various Plans. The Evaluation Process Anyone who is considering engaging in an activity which a reasonable person might consider competitive activity as described above should notify the Director, Executive Human Resources, and request that the Company evaluate the activity to determine whether it is competitive. To insure that the Company's evaluation is fairly based on all relevant facts and circumstances, an individual who requests a determination should provide the Company in writing with all information he or she believes to be relevant to the inquiry as well as a full explanation of the contemplated activity which describes Determination Final determination of whether an individual's activity is or is not competitive activity will be made by the Committee and the Committee alone. The determination will be based on the recommendations as described above, the best interests of the Company and on all other facts and circumstances the Committee deems pertinent. After the Committee's determination, the Director, Executive Human Resources, will notify the individual of the decision in writing. If the Committee's determination is that activity is not competitive activity , the individual may receive a letter advising of that determination. In such case, the Committee reserves the right to seek, at whatever intervals it deems appropriate, written assurance from the individual that the facts and circumstances on which the evaluations and the determination were based have not changed. An individual who has not yet engaged in activity which would be considered competitive activity will have the opportunity to provide the Company within a reasonable period of time written assurance that he or she has not and will not engage in such activity. If the Company receives such assurance no forfeiture will result. If the individual fails to provide such assurance or if he or she is already engaged in competitive activity and does not withdraw from it, then the Director, Executive Human Resources, will coordinate termination of all benefits with the Payroll, Benefit and all other affected organizations. The Committee or its delegate may also take legal steps to recover any benefits already paid. Opportunity to Withdraw After activity has been evaluated and recommendations submitted as described above, the Committee may determine that there are unusual or special circumstances which are persuasive that withdrawal or denial of benefits is not appropriate. In that case, the Committee may, in its discretion and judgment, withhold termination or denial of benefits and offer the individual the opportunity to withdraw from the competitive activity. An individual who receives such an offer will have a reasonable period of time from the date of the offer to accept it and to provide the Committee assurance in writing that the withdrawal has been accomplished, or the offer will lapse and a notice to terminate benefits will be issued. This guideline is published by the Executive Human Resources group of AT&T Corporate Headquarters. Questions and requests for additional copies may be directed to Director, Executive Human Resources, AT&T Corporate Headquarters, 295 North Maple Avenue, Room 7244M3, Basking Ridge, New Jersey 07920. April 1997 EX-12 14 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AT&T Corp. Computation of Ratio of Earnings to Fixed Charges (Dollars in Millions) (Unaudited) For the Year Ended December 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Earnings Before Income Taxes $7,193 $8,810 $4,978 $7,020 $6,210 Less Interest Capitalized during the Period 254 193 107 39 61 Add Equity Investment Losses, Net of Distributions of Less than 50% Owned Affiliates 144 155 205 91 59 Add Fixed Charges 720 775 699 764 1,008 Total Earnings $7,803 $9,547 $5,775 $7,836 $7,216 Fixed Charges Total Interest Expense Including Capitalized Interest $ 446 $ 536 $ 481 $ 531 $ 761 Interest Portion of Rental Expense 274 239 218 233 247 Total Fixed Charges $ 720 $ 775 $ 699 $ 764 $1,008 Ratio of Earnings to Fixed Charges 10.8 12.3 8.3 10.3 7.2 EX-13 15 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS January 1, 1997, marked a beginning for AT&T. The challenge of completing the "trivestiture" was behind us and we entered the new year as a new company -- one better focused and prepared to face the increasingly competitive and dynamic telecommunications industry. As our experience in 1997 proved, however, the most challenging period in this company's history did not end with trivestiture. Rather, we had just begun the work needed to position ourselves strategically and financially in order to grow profitably in the years to come. Change and complexity characterized the industry in 1997. New services continued to emerge -- services like voice over the Internet and Internet Protocol(IP) networks. Digital technology continued to revolutionize the wireless communications business. Demand for data transmission services such as frame relay multiplied, and corporations demanded help managing their ever more complex, more global telecommunications needs. The maze of regulatory issues impacting our business grew more and more intricate. Even the very structure of the industry changed as companies from all parts of the industry looked for partners to help them become providers of complete offerings of telecommunications services. As if all this wasn't challenging enough in 1997, competition intensified in our long-distance and wireless businesses where we faced some of the stiffest competitive conditions around. Aggressive industry pricing practices put pressure on our margins in long-distance services for businesses. The competition used price and innumerable other tactics to attack our residential base and new competitors entered wireless markets all over the country with aggressive offers. Our mission for 1997 was to take the critical actions needed to prepare AT&T for the future. Our ultimate ability to deliver shareowner value depends on the strategic position and the financial strength and flexibility that we create for ourselves today. But we also understand the need to balance concern for the future with our investors' expectations for solid financial performance in the present. So in 1997, we did invest for the future. We invested in our local service initiative which reduced earnings before interest and taxes (EBIT), including other income, and earnings before interest, taxes, depreciation and amortization (EBITDA), including other income, by over $900 million each and reduced earnings per share by about $0.37. We did not get the return we wanted on this investment, so we made the important economic decision to discontinue our efforts to sell local service to residential customers on a total services resale basis. We remain committed to providing local service to our residential customers, but only when an economically viable means of doing so can be developed. On the business side, we accelerated our local entry in January 1998 when we executed a merger agreement with Teleport Communications Group, Inc. (TCG), the largest competitive local exchange carrier. TCG brings to AT&T local facilities in 66 of the top U.S. markets, along with the management expertise we need to win in the business local market. The TCG deal, valued at about $11 billion, is expected to generate over $1 billion in synergies in 1999, growing to $2.2 - $2.5 billion in 2002. Under the agreement each share of TCG will be exchanged for .943 of an AT&T share. The merger, which remains subject to regulatory approval and certain other conditions, is expected to close in the second half of 1998. We also continued to develop businesses that are important to our long-term success. These businesses include international markets (excluding bilateral traffic), AT&T Solutions -- our outsourcing, consulting and networking integration professional services business; AT&T WorldNet -- our Internet access service for homes and businesses, and wireless service in new 1.9 GHz markets. We invested heavily in these businesses in 1997; they further reduced AT&T's EBIT by over $1.5 billion, EBITDA by more than $1.2 billion and earnings per share by about $0.58 for the year. A chart appears containing the following information: AT&T Two-year EPS* Trend +: Core EPS in dollars #: Total EPS in dollars @: Initiatives EPS in dollars Dollars 1.20 + + + + # + + + # # # 0.80 + # # # # 0.40 0 @ @ @ @ @ @ @ @ (0.40) 1Q96 2Q96 3Q96 4Q96 1Q97 2Q97 3Q97 4Q97 Year Core Inits Total 1996 4.04 (0.59) 3.45 1997 3.69 (0.95) 2.74 *All earnings per share information in this discussion is presented on a diluted basis, meaning that the share balance used in the calculation includes shares outstanding plus shares that may be issued as a result of the exercise of options. We continued to invest in our core long-distance business as well. The AT&T network handled a record volume of traffic in 1997, including a new one-day record of 319 million calls on the Monday after Thanksgiving. Approximately 99.96% of these calls were completed on the first try. In order to maintain this level of capacity and reliability, as well as respond to new demands, we invested the majority of our capital spending in 1997 in the long-distance network, deploying Synchronous Optical Network (SONET) technology rings across the country and increasing the capacity of our data networks. A chart appears containing the following information: Number of Calls on the Network #: Number of calls on the Network. 80 Billion # 70 # # 60 50 40 30 20 10 0 1995 1996 1997 All this investment, plus the effects of competition on our core long-distance and wireless businesses, put a strain on our financial performance. As a result, our 1997 earnings were down from the prior year, as explained below in the discussion of our financial results for the year. But again, we recognize the need to balance investment with current earnings and to have maximum financial flexibility in this growing industry. Therefore, we moved aggressively to shore up our financial position and stabilize our earnings. We continued to divest assets and businesses not critical to our long-term strategy. We completed the sales of AT&T Tridom, AT&T Skynet, our submarine systems business and our investment in DirecTV. We reached agreements to sell UCS, AT&T Solutions Customer Care, and our holdings of LIN Television Corporation and WOOD-TV. We also reduced our strategic investment in SmarTone Communications. All told, we expect these transactions to generate about $6.7 billion in cash for AT&T (pretax). As a result, our already solid balance sheet will become even stronger. In order to deliver on the earnings expectations of our investors and to position ourselves for the future, we attacked our cost structure aggressively in 1997 and intend to do a lot more in 1998 and beyond. As a result of our cost reduction efforts, our selling, general and administrative (SG&A) expenses declined in the fourth quarter of 1997. Our earnings, after hitting the low-water mark in the second quarter, showed sequential improvement in the third and fourth quarters. EBITDA also trended upward in the second half, as the chart below shows. Further, we expect to reduce SG&A by $1.6 billion in 1998 and our goal is to achieve a level of SG&A expenses equal to 22% of revenues by the end of 1999. On January 26, 1998, we announced a voluntary retirement incentive program to be offered to managers during the second quarter of 1998. The expected acceptance rate of 10,000 to 11,000 employees for the voluntary retirement incentive offer may impact the utilization of the remaining 1995 restructuring reserve balance. Another 5,000 to 7,000 employees will leave through a combination of managed attrition and previously announced workforce reductions. A chart appears containing the following information: AT&T Two-year EBITDA Trend +: Core EBITDA in dollars #: Total EBITDA in dollars @: Initiatives EBITDA in dollars AT&T Two-year EBITDA Trend Dollars in Millions 4,000 + 3,500 + + + + + # # + # # + 3,000 # # # 2,500 # 2,000 1,500 1,000 500 0 @ @ @ @ (500) @ @ @ @ (1,000) 1Q96 2Q96 3Q96 4Q96 1Q97 2Q97 3Q97 4Q97 Shareowners recognized our efforts in 1997. AT&T was the top performing stock in the Dow Jones Industrial Average (DJIA) for the six months ending December 31, 1997, and had the seventh-highest appreciation among the Dow stocks for the full year. Our stock generated a total return, including dividends, of over 53% in 1997. We hope to continue to produce a high return in 1998 and beyond by delivering earnings growth. A chart appears containing the following information: @: AT&T performance vs DJIA in 1997 #: The DJIA performance in 1997 155% 145% @ 135% 125% # @ # # # # # 115% # # # @ 105% # # @# # @ 95% @ @ @ 85% @ @ @ @ @ 75% 65% 12/ 1/ 2/ 3/ 4/ 5/ 6/ 7/ 8/ 9/ 10/ 11/ 12/ 31/ 31/ 28/ 31/ 30/ 30/ 30/ 31/ 29/ 30/ 31/ 28/ 31/ 96 97 97 97 97 97 97 97 97 97 97 97 97 OPERATING RESULTS Our income from continuing operations decreased $1,101 million, or 19.8%, in 1997 and increased $506 million, or 10.0%, in 1996. Lower earnings from the core business and increased dilution from investment in initiatives contributed almost equally to the decline in earnings in 1997. Core earnings were lower due primarily to higher depreciation and amortization expenses driven by higher levels of capital investment. In 1997 we invested $7.2 billion in capital, the majority of which was directed toward increasing the capacity and technology of our long-distance and wireless networks, including the installation of SONET facilities. We expect to complete our SONET program in 1998 with a total of 52 rings providing coast-to-coast connectivity. Our local service efforts and our expansion into new wireless markets were the primary drivers of the increase in dilution from initiatives in 1997. In 1995 our core business recorded pretax charges of $3,023 million of restructuring and other charges. The charges covered consolidating and reorganizing numerous corporate and business units over several years. The total pretax charge was recorded as $844 million in network and other communications services expenses, $934 million in depreciation and amortization expenses, and $1,245 million in selling, general and administrative expenses. The tax benefit associated with the charges was $991 million. The total impact on income from continuing operations was $2,032 million, or $1.28 per share. The impact on income from discontinued operations was $3,321 million, or $2.08 per share. The impact on net income was $5,353 million, or $3.36 per share. Discussions presented here exclude the impact of these charges unless noted. Dollars in Millions For the Years Ended December 31 1997 1996 1995* Income from Continuing Operations $4,472 $5,573 $5,067 Income from Discontinued Operations 100 173 425 Gain on Sale of Discontinued Operations 66 162 - Net Income $4,638 $5,908 $5,492 Earnings Per Share - Diluted: Income from Continuing Operations $ 2.74 $ 3.45 $ 3.19 Income from Discontinued Operations 0.06 0.11 0.26 Gain on Sale of Discontinued Operations 0.04 0.10 - Net Income $ 2.84 $ 3.66 $ 3.45 Earnings Per Share - Diluted: Core $ 3.69 $ 4.04 $ 3.40 Initiatives (0.95) (0.59) (0.21) Total Continuing Operations $ 2.74 $ 3.45 $ 3.19 *Excludes restructuring and other charges Income related to discontinued operations, including gains on disposals, was $166 million in 1997 and $335 million in 1996. As of December 31, 1997, UCS is the only business remaining in discontinued operations. We completed the sale of our submarine systems business in the third quarter of 1997, and in 1996 we successfully divested Lucent, NCR, AT&T Capital and other businesses. REVENUES We reported our 1997 revenues in five categories: business and consumer long-distance services, wireless services, local and other initiatives, and other and eliminations. Total revenues grew $773 million, or 1.5%, in 1997 and $2,101 million, or 4.3%, in 1996. Dollars in Millions For the Years Ended December 31 1997 1996 1995 Business long-distance services $22,212 $21,591 $20,496 Consumer long-distance services 23,962 24,650 24,299 Wireless services 4,337 3,931 3,368 Local and other initiatives 2,226 1,569 1,393 Other and eliminations (1,418) (1,195) (1,111) Total revenues $51,319 $50,546 $48,445 A pie chart appears containing the following information: AT&T 1997 External Revenue by Category As percentage of total revenue 47% Consumer long-distance services 41% Business long-distance services 8% Wireless services 4% Local and other initiatives Business long-distance services revenue, made up primarily of revenue from voice and data services, and related products sales, increased $621 million, or 2.9%, in 1997 and $1,095 million, or 5.4%, in 1996. Adjusted for the sales of AT&T Skynet and AT&T Tridom, business revenue grew 3.5% in 1997. Strong growth in revenue from data services -- frame relay and other emerging services as well as private line -- drove the increase in business revenue. Revenue growth from voice services was hampered by pricing pressure brought on by a number of factors. Many voice service contracts were renegotiated during the year, encouraged by uncertainty surrounding the possibility of detariffing. Competitive pressure caused many of these contracts to be renegotiated at lower rates. Also, reductions in access costs were passed to customers in the form of lower rates, further pressuring revenue growth. Revenue growth in 1996 was fueled by both strong growth in business inbound (toll-free 800 and 888 services) and data services. Calling volume, or billed minutes, in business long-distance services grew in the mid-teens in both 1997 and 1996, both led by strong volume growth in inbound services as well as growth in outbound services and government markets. Despite very competitive conditions, we held our market position in business services with such major contract wins as American Express, Prudential, CVS, American Home Products and the State of Florida. Again, lower price levels on voice contracts substantially offset the growth in calling volume though the pricing environment began to show signs of stabilization in the fourth quarter of 1997. Consumer long-distance services revenue declined $688 million, or 2.8%, in 1997 and increased $351 million, or 1.4%, in 1996. However, our 1997 revenue growth was impacted by a number of strategic choices intended to improve profitability. For instance, we accelerated the use of free minutes as a customer incentive in 1997, increasingly using them in place of checks. Since free minutes are presented as contra-revenue on the income statement while checks are classified as expense, our move toward free minutes served to reduce revenue growth. This shift, plus the effects of flowing savings from access reform through to customers resulting in lower prices, accounted for 2 percentage points of the 2.8% decline in revenue. The remaining decline was primarily due to another move designed to improve long-term profitability -- the migration of customers to more favorable optional calling plans. This is a key element in our strategy to retain our most profitable customers. Partially offsetting the declines was growth in intraLATA, or local-toll services. Presubscription processes allowing customers to choose AT&T as their preferred local-toll carrier helped revenue from these services grow substantially in 1997. In 1996 the increase in consumer revenue was driven by price increases instituted throughout the year. Another element in our strategy to attract and retain the most profitable residential customers and to improve our bottom line was to refine our marketing efforts in the second half of the year so that the customer base we targeted for acquisition would not include customers who are not profitable to us. While not having a material impact on consumer revenue or volume for the full year 1997, this strategic shift may cause further pressure on these measures in the future. Consumer calling volume increased by a low-single-digit percentage in 1997 compared with a decrease of a similar magnitude in 1996. The increase was due to strong growth in intraLATA volume, again as a result of capturing the opportunity offered by local-toll presubscription, while in 1996 declines in domestic volumes were partially offset by growth in international volumes. Total long-distance services revenues -- the sum of the business and consumer categories -- was $46,174 million in 1997, essentially flat compared with $46,241 million in 1996. Volume increased 8.7% for the year. In 1996 long-distance revenues increased $1,446 million, or 3.2%, on a volume increase of 5.9%. The gap between volume and revenue growth widened to 8.8% in 1997 due to the revenue factors mentioned above, including the flow-through of access charge reductions, and also due to the growth in lower-priced services such as intraLATA. The 1996 gap reflected the impact of promotional discounts, increased movement of customers to optimal calling plans and increased discounts given to large accounts. In addition, international volumes increased in 1996 while international revenue remained relatively flat. Wireless services revenue, which includes wireless voice and data, messaging, air-to-ground services and product sales, increased $406 million, or 10.3%, in 1997. Revenue from AT&T's new 1.9 GHz markets is included in this figure, although its impact on the annual growth rate was minimal. Adjusted for the impact of wireless properties disposed of in December 1996, the 1997 revenue growth rate would have been 12.9%. The revenue growth was driven by consolidated subscriber growth of 15.7% (18.3% adjusted) in 1997. In 1996 wireless revenue increased $563 million, or 16.7%, on a 31.7% increase in subscribers. The slower rates of growth in 1997 reflect the increased competition that characterized the wireless industry in 1997. Competition was particularly fierce in the southwestern and western areas of the U.S. where the introductory offers of new market entrants were often met with equally competitive offers from incumbent cellular competitors. The lower growth rates also reflect the fact that while new competitors have had a significant impact in many of our cellular (850 MHz) markets, we are just beginning to penetrate new markets with AT&T Digital PCS service on the 1.9 GHz spectrum. Finally, similar to our consumer strategy, toward the end of 1997 we began focusing our efforts on targeting high-value wireless customers and reducing sales to lower-end subscribers. While this strategic move impacted both revenue and subscriber growth rates in 1997, and will continue to impact these growth rates in 1998, it is designed to improve the profitability of the wireless business. MAP OF THE UNITED STATES DISPLAYING AT&T WIRELESS SERVICES LICENSES FOOTPRINT BY CELLULAR MARKET, PCS MARKET AND PARTNERSHIP MARKET This strategic shift, if successful, will help support our average revenue per user (ARPU) over time. In 1997 the impact of industry-wide competitive pricing pressure, along with increased "convenience" usage of wireless phones, overcame any benefit from our high-value strategy. ARPU in our existing cellular markets fell to $54 per month from approximately $60 in 1996 and $69 in 1995. Wireless customers, or subscribers, in markets where AT&T owns a majority interest (consolidated markets), stood at 6.0 million at December 31, 1997. This included over sixty thousand subscribers in our new 1.9 GHz markets. Cellular subscribers at December 31, 1996, and 1995 were 5.2 million and 3.9 million, respectively. Cellular subscribers in markets in which we have or share a controlling interest were 8.2 million at December 31, 1997, up 14.7% from 7.1 million at December 31, 1996. Cellular customers on this basis were 5.5 million at December 31, 1995. Revenue for local and other initiatives increased $657 million, or 42.0%, in 1997 and $176 million, or 12.6%, in 1996. The 1997 increase resulted primarily from increases in outsourcing revenue at AT&T Solutions, as well as revenue from international markets, AT&T WorldNet and local service. Outsourcing revenue and revenue from AT&T WorldNet drove the increase in 1996, partially offset by a decline in revenue from international markets. Other and eliminations revenue primarily reflects the elimination of revenues for services sold between categories (e.g., sales of business long-distance services to other AT&T units). OPERATING EXPENSES For the year, operating expenses totaled $44,351 million, an increase of 6.1% from $41,783 million in 1996. In 1996 expenses increased 3.8% from $40,238 million. Dollars in Millions For the Years Ended December 31 1997 1996 1995 Access and other interconnection $16,306 $16,332 $17,618 Access and other interconnection expenses are the charges that we pay to connect calls on the facilities of local exchange carriers and other domestic service providers, and fees that we pay foreign telephone companies (settlements) to connect calls made to and from foreign countries on our behalf. These charges are designed to reimburse these carriers for the common and dedicated facilities and switching equipment used to connect our network with theirs. These costs remained essentially flat in 1997 as lower per-minute access costs were offset by solid volume growth and a beneficial second quarter 1996 accounting adjustment of previously estimated accruals to reflect actual billing. The lower per-minute access costs are primarily the result of declines in international settlement rates and access charge reform mandated by the Federal Communications Commission (FCC) effective for the second half of 1997. Interstate and intrastate tariff reductions, changes in traffic mix and network planning also contributed to the lower per-minute access costs. In 1996 access costs declined $1,286 million, or 7.3%, again due to lower per-minute access costs. This resulted from changes in the price-setting methodology approved by the FCC effective in the second half of 1995, and also from improvements in our infrastructure and reduced international settlements payments. The beneficial accounting adjustment mentioned above also contributed to the reduction. Access and other interconnection expenses were 31.8% of revenues in 1997, 32.3% in 1996 and 36.4% in 1995. We expect this percentage to continue to decline over time as we realize synergies from our pending merger with TCG. Dollars in Millions For the Years Ended December 31 1997 1996 1995* Network and other communications services $9,316 $7,918 $6,913 *Excludes restructuring and other charges of $844 Network and other communications services expenses include the costs of operating and maintaining our network, operator services, nonincome taxes, the provision for uncollectible receivables and compensation to payphone operators. More than half of the $1,398 million, or 17.6%, increase in 1997 was due to higher costs for initiatives, particularly AT&T Solutions, AT&T WorldNet and local service. The remaining increase was primarily driven by FCC-mandated compensation to payphone operators and higher expenses for operating and maintaining our network. Expenses for operating and maintaining our network increased due to higher costs for purchases from Lucent at retail and otherwise remained essentially unchanged despite increased calling volumes and the increased complexity of our service offerings. Growth in payphone compensation expense decelerated in the fourth quarter when the FCC agreed to a reduction in the per-call rate from $0.350 to $0.284. As a result of this action, AT&T was able to reverse some of the expense previously accrued in 1997. We are currently asking for further relief from this expense as we believe that the $0.284 per call rate remains above the actual cost to payphone operators of providing services. Network and other communications services expenses increased $1,005 million, or 14.5%, in 1996. The increase was due to increased costs from our expansion into new initiatives, enhancements made in customer care facilities and a higher provision for uncollectibles. Dollars in Millions For the Years Ended December 31 1997 1996 1995* Depreciation and amortization $3,827 $2,740 $2,586 *Excludes restructuring and other charges of $934 Depreciation and amortization expenses increased $1,087 million, or 39.6%, in 1997. The increase was driven by higher levels of capital expenditures which totaled $3.0 billion in the fourth quarter of 1996 and $7.2 billion in 1997. In addition to higher volumes of purchases, the impact of purchasing assets at retail from Lucent also contributed to the higher level of capital spending. The 1997 expenditures were primarily for our long-distance and wireless networks, including the deployment of SONET. We also invested substantial capital in building our capability for local and WorldNet services. These capital investments were required to provide for growth in calling volumes, to increase capability, to introduce new technology, to enhance reliability, to expand our wireless footprint and to establish a local presence. We expect depreciation and amortization expenses to increase further in 1998 as we continue to expand and enhance our network. Depreciation and amortization increased $154 million, or 6.0%, in 1996. The increase was primarily the result of investment in the network partially offset by the impact of asset write-downs at the end of 1995. Dollars in Millions For the Years Ended December 31 1997 1996 1995* Selling, general and administrative $14,902 $14,793 $13,121 *Excludes restructuring and other charges of $1,245 Selling, general and administrative expenses increased $109 million, or 0.7%, in 1997. SG&A expenses were 29.0% of revenues in 1997, 29.3% in 1996 and 27.1% in 1995. While investment in initiatives and spending on transitory projects, such as preparation of our systems for the year 2000 ($113 million), put upward pressure on SG&A expenses in 1997, core SG&A spending declined for the year as a result of our efforts to achieve a competitive cost structure. The decline in core SG&A expenses came primarily from lower advertising expenses across the company, lower acquisition costs in consumer markets -- primarily a reduction in the use of checks to acquire customers, and lower marketing and sales expenses in business markets. As the chart shows, our year-over-year growth in SG&A declined each quarter in 1997. A chart appears containing the following information: SG&A Expenses Year-over-Year Growth #: SG&A Expenses Year-over-Year Growth Rate Percentages 7.00% # 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% # 0.00% (1.00%) # (2.00%) # (3.00%) 1Q97 2Q97 3Q97 4Q97 Partially offsetting our savings were higher retention and acquisition costs in wireless markets. AT&T Wireless Services invested heavily in migrating customers to digital service in 1997, which lowers costs over time. These migration costs plus the costs of servicing a growing customer base caused the increase in overall customer costs in wireless. However, cost per customer acquisition in cellular markets was 6.1% lower in 1997 than in 1996 as a result of our focus on less expensive distribution channels. Selling, general and administrative expenses increased $1,672 million, or 12.7%, in 1996 due to expenditures for new initiatives, higher marketing and sales expenses, and enhancements to customer care facilities. Our initiatives represented about 30% of our increase in 1996. We have established processes for evaluating and managing the risks and costs associated with preparing our systems, global networks and applications for the year 2000. We expect to incur internal staff costs as well as consulting and other expenses related to the conversion and testing of our systems, global networks and applications. We expect the cost of this project to be approximately $350 million in 1998. Slightly more than half of these costs represent internal information technology resources that have been redeployed from other projects and are expected to return to these projects upon completion. We plan on having substantially all modifications completed by the end of 1998, leaving a full year for testing. We are still assessing the impact to us, if any, in 1999. Also included in SG&A expenses were $829 million, $822 million and $732 million of research and development expenses in 1997, 1996 and 1995, respectively. Research and development expenditures are mainly for work on advanced communications services and projects aimed at IP services. These expenses included $6 million of restructuring and other charges in 1995. Dollars in Millions For the Years Ended December 31 1997 1996 1995 Other income - net $416 $390 $284 Other income - net in 1997 included the gain on the sale of AT&T Skynet ($97 million), gains and losses on sales of cellular investments, increases in the value of corporate-owned life insurance policies on officers, net equity earnings from investments and other miscellaneous transactions, none of which are individually significant. In 1996 other income - net included sales and exchanges of cellular properties, increases in the value of corporate-owned life insurance policies on officers, net equity earnings from investments and other miscellaneous transactions. In addition, other income for 1996 included a loss on our investment in Novell, Inc. Dollars in Millions EBIT For the Years Ended December 31 1997 1996 1995 Total AT&T* $7,384 $9,153 $8,491 Wireless services $271 $600 $406 *Excludes restructuring and other charges of $3,023 in 1995 EBIT decreased $1,769 million, or 19.3%, in 1997 primarily as a result of increases in network and other communications services expenses and depreciation and amortization expenses partially offset by increased revenues. As discussed above, the higher depreciation expense relates primarily to our core business, while investment in initiatives drove the increased network and other communications services expenses. The $662 million, or 7.8%, increase in 1996 was primarily due to an increase in revenues and a decrease in access and other interconnection expenses partially offset by increases in both SG&A expenses and network and other communications services expenses. Wireless services EBIT in 1997 contained a $160 million charge to exit the two-way messaging business as well as increased dilution from wireless initiatives. EBIT for wireless services for 1996 contained a gain on the exchange of several wireless properties. Dollars in Millions For the Years Ended December 31 1997 1996 1995 Interest expense $191 $343 $490 Interest expense decreased $152 million, or 44.1%, in 1997 due to lower levels of average debt and a higher proportion of capitalized interest. Average debt was higher in 1996 due to the additional debt associated with Lucent. We capitalized a greater proportion of our interest expense in 1997 primarily due to higher qualifying assets for our local initiative. Interest expense decreased $147 million, or 30.1%, in 1996 compared with 1995 due to lower levels of average debt, which were primarily attributable to the assignment of debt to Lucent and the application of the proceeds from the sale of AT&T Capital. Dollars in Millions For the Years Ended December 31 1997 1996 1995* Provision for income taxes $2,721 $3,237 $2,934 *Excludes restructuring and other charges of $991 The effective income tax rate is the provision for income taxes as a percentage of income from continuing operations before income taxes. The effective income tax rate was 37.8% in 1997 and 36.7% in both 1996 and 1995. The effective tax rate in 1997 was impacted by investment dispositions announced in 1997. The 1996 effective income tax rate was reduced by tax benefits associated with various legal entity restructurings while the 1995 rate was favorably impacted by lower state tax rates and higher research credits. The 1995 effective tax rate including restructuring and other charges was 39.0%. GROWTH INITIATIVES We have undertaken a number of initiatives in order to ensure that we have a complete portfolio of services that customers demand. While these initiatives currently have a dilutive impact on our earnings, they are expected to contribute significantly to our future earnings and revenue growth. The following are summaries of these initiatives and their impacts on our earnings for the last three years. Data on initiatives include costs and expenses on an incremental basis and require certain estimates and allocations that management believes provide a reasonable basis on which to present such information. Accordingly, all data presented represent approximate amounts. PHOTOGRAPH OF AN AT&T WIRELESS PHONE Dollars in Millions Local Services Initiative For the Years Ended December 31 1997 1996 1995 EBIT $(987) $(467) $(155) EBITDA $(916) $(457) $(155) Capital Expenditures $ 853 $ 775 $ 353 We continue to work to provide local service to business and residential customers across the country. In 1997 we introduced AT&T Digital Link local service for medium- and large-sized businesses. At the end of 1997 AT&T Digital Link service was available in 49 states for outbound local calling. Inbound capability, however, was and remains delayed by the lack of local number portability and other factors. Our pending merger with TCG is an aggressive move to expand our reach and propel our entry into the market for business local service and dedicated access. In residential markets at the end of 1997 we offered resold local service in seven states. However, in spite of strong demand, in the fourth quarter we stopped actively marketing resold local service to residential and small business customers in most of these areas because of the limitations on the local exchange carriers' ability to handle anticipated demand and because the discounts we receive from the local exchange carriers on the sale of these services are insufficient to make resale a viable long-term method of offering service. The economic conditions of the total services resale approach simply do not allow us to provide local service profitably. Nevertheless, despite the difficulty of the regulatory environment, local service is a key growth opportunity and we will continue to work to develop alternative methods of local entry. Dollars in Millions Wireless Initiatives For the Years Ended December 31 1997 1996 1995 EBIT $(432) $ (95) $ - EBITDA $(310) $ (76) $ - Capital Expenditures $ 823 $ 659 $ - Our wireless initiatives include wireless service in new markets, wireless data services and international expansion. Our primary wireless initiative is to provide services in new markets on the 1.9 GHz spectrum purchased in the FCC's "A and B Block" auction in 1996. During 1997 we activated nine systems: Phoenix/Tucson in the second quarter; Atlanta and Chicago in the third quarter, and Philadelphia, Washington D.C./Baltimore, Cleveland, Charlotte, St. Louis and Detroit in the fourth quarter. In addition, we activated our system in Boston in January 1998. These markets extend the availability of AT&T Digital PCS, which has already been introduced in AT&T's 850 MHz markets, and extends into Canada through our partnership with Cantel. Also, in order to extend the reach of AT&T's digital wireless services, we have announced a number of partnerships with other wireless carriers. Through February 1998 we had announced agreements with Triton PCS, Telecorp, and Cincinnati Bell, as well as an interoperability agreement with Dobson Communications. These agreements will allow us to achieve a build-out of certain license areas with minimal capital investment. The increased EBIT dilution from wireless initiatives in 1997 primarily relates to a $160 million charge to exit the two-way messaging business, as well as expenses related to the activation of the new 1.9 GHz markets. Dollars in Millions Other Initiatives For the Years Ended December 31 1997 1996 1995 EBIT $(1,097) $(975) $(392) EBITDA $ (917) $(888) $(283) Capital Expenditures $ 308 $ 245 $ 159 PHOTOGRAPH OF INSIDE AN AT&T SOLUTIONS FACILITY Other initiatives include AT&T Solutions, AT&T WorldNet and other online services, and international markets (excluding bilateral traffic). AT&T Solutions continued to grow and made progress in 1997 toward achieving profitability. We expect AT&T Solutions to turn profitable in 1998. In 1997 AT&T Solutions won contracts with such companies as 1-800-FLOWERS, Bear Stearns, Hallmark, Royal Bank of Canada, Chung Hwa Telecommunications, PT Telkom, Norwest Bank, Best Buy and United Airlines. EBIT dilution from AT&T Solutions decreased 53% in 1997 and increased 4% in 1996. IMAGE OF THE AT&T WORLDNET HOMEPAGE In 1997 we continued to develop our presence in the Internet access and electronic commerce businesses through our online services such as AT&T WorldNet and electronic commerce businesses. AT&T WorldNet signed up its one-millionth customer in the fourth quarter of 1997 and finished the year with 1.01 million Internet access customers. This represents an increase of 443,000 subscribers for the year. As AT&T WorldNet's initial promotional activity began to expire in 1997, subscriber growth slowed as many customers who were receiving the free promotion deactivated service. We continue to explore ways of growing the Internet access business and realizing synergies between it and other AT&T businesses. For example, in January 1998 we announced a long-distance offer targeting Internet access customers. Beginning in March 1998 AT&T WorldNet customers can sign up for long-distance services via AT&T's Web site and receive a rate of nine cents per minute. Globally, we focused our strategy on serving multinational corporations and global travelers and expanding our North American franchise in Canada and Mexico. Alestra, our Mexican joint venture with Grupo Alfa and VISA-Bancomer, had over one million lines presubscribed in 1997, leading all of the other carriers competing against the former monopoly carrier, TelMex. However, equity losses from Alestra exceeded our expectations in 1997. In 1997 we also announced a proposed alliance with Telecom Italia that we believe will enhance our ability to serve multinational customers in Europe and Latin America. Telecom Italia will join the AT&T-Unisource joint venture in Europe. In addition, we plan to form a joint venture with Telecom Italia to serve customers in Latin America. CASH FLOWS Dollars in Millions EBITDA For the Years Ended December 31 1997 1996 1995 Total AT&T* $11,277 $11,955 $11,127 Wireless services $1,237 $1,332 $971 *Excludes restructuring and other charges of $2,089 in 1995 EBITDA is a measure of our ability to generate cash flow and should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with generally accepted accounting principles. The decrease of $678 million, or 5.7%, in 1997 was due primarily to an increase in network and other communications services expenses partially offset by increased revenues. The 1996 increase of $828 million, or 7.4%, was primarily due to an increase in revenues and a decrease in access and other interconnection expenses partially offset by increases in both SG&A expenses and network and other communications services expenses. Wireless services EBITDA in 1997 contained an $80 million charge to exit the two-way messaging business and also reflected increased dilution from initiatives. EBITDA for wireless services for 1996 contained a gain on the exchange of several wireless properties. All cash flow discussions pertain to cash flows from continuing operations. Dollars in Millions For the Years Ended December 31 1997 1996 1995 Cash flows from operating activities $8,437 $7,875 $8,198 Cash flow from operations increased $562 million, or 7.1%, in 1997 and decreased $323 million, or 3.9%, in 1996. A number of factors drove the increase in 1997 including the collection of employee-benefit-related receivables from Lucent in 1997 and improved customer cash collections across the company. In addition, 1996 cash flow from operations included a $500 million prepayment to Lucent. The decrease in 1996 related mainly to required cash payments for restructuring and other charges amounting to $471 million. Dollars in Millions For the Years Ended December 31 1997 1996 1995 Cash flows used in investing activities $(6,407) $ (975) $(8,163) A chart appears containing the following information: 1997 Capital Expenditures by Business #: Business Long-distance @: Consumer Long-distance ^: Traditional Wireless &: Wireless Initiatives +: Local Service >: Other Initiatives dollars in billions 4 3.5 # 3 2.5 2 1.5 1 + & @ ^ .5 > 0 Business Consumer Traditional Wireless Local Other Long- Long- Wireless Initiatives Service Initiatives distance distance PHOTOGRAPH OF AT&T'S WORLDWIDE NETWORK OPERATIONS CENTER Included in 1997 investing activities were net capital expenditures, the net funding requirements for UCS, acquisitions of licenses and proceeds received from divestments. While we have agreed to sell UCS, we continue to fund its operations. Our assets, therefore, include short- and long-term notes receivable from UCS, and our debt includes external debt used to fund UCS. In accordance with the purchase agreement, at the time of sale in 1998 we will receive cash from Citibank for the notes receivable from UCS. Cash used in investing activities increased significantly in 1997 compared with 1996 primarily as a result of the lower level of credit card receivables securitized in 1997 by UCS ($1 billion) versus receivables securitized in 1996 ($3 billion). Due to the significant cash generated from the 1996 securitizations, UCS lowered its debt requirements and subsequently repaid $3,360 million of its notes payable to us. In 1997, with reduced securitizations and a growing portfolio, UCS increased its notes payable to us. PHOTOGRAPH OF AN AT&T UNIVERSAL CARD SERVICES CREDIT CARD Capital expenditures, acquisitions of investments, licenses and businesses amounted to $7,648 million in 1997, $7,183 million in 1996 and $9,888 million in 1995. This resulted in net cash outlays for these categories in 1997, 1996 and 1995 of $7,578 million, $6,741 million and $9,981 million, respectively. We expect our 1998 capital expenditures to be about $7 billion; in addition, TCG anticipates 1998 capital expenditures of $1 billion. These expenditures include the completion of our three-year program of SONET deployment as well as additional capital to meet our customers' needs for new technology and increased capacity in long-distance, wireless, WorldNet and local services. Dollars in Millions For the Years Ended December 31 1997 1996 1995 Cash flows from financing activities $(1,801) $(5,380) $1,457 In 1997 we raised all necessary external financing through issuances of commercial paper. We expect to be able to arrange any necessary future financing using issuances of commercial paper, long-term debt and equity, with the timing of issue, principal amount and form depending on our needs and the prevailing market and economic conditions. We do not anticipate requiring additional external financing in 1998 to fund capital expenditures and dividend payments. During 1997 we retired long-term debt of $662 million and increased short-term borrowings by $1,114 million. The increase in short-term debt was primarily due to increased funding requirements of UCS. In 1996 we retired long-term debt of $1,236 million and decreased short-term debt by $5,301 million. The changes in debt reflected the use of alternative sources of funding, such as securitization, as well as Lucent's use of its own external financing in 1996. Additionally, the cash collection of the $2.0 billion in accounts receivable retained by AT&T continuing operations as part of the restructuring plan and the proceeds of $1.8 billion from the sale of AT&T Capital were used to pay down our debt. During 1995 we retired $2,137 million of long-term debt, but borrowed an additional $2,392 million of long-term debt and $1,976 million of short-term debt. In 1997 we obtained substantially all of the stock for our shareowner and employee benefit stock-ownership plans in the open market rather than issuing new shares. This required us to use the cash received from shareowners and employees to purchase the shares, resulting in a cash payment of $163 million. In 1996 and 1995 the stock used in our shareowner and employee benefit stock-ownership plans was issued from unissued or treasury shares. Accordingly, during those years we kept the more than $1.2 billion of cash received from shareowners and employees for the issuances of shares. We paid dividends of $2,142 million in 1997, $2,122 million in 1996 and $2,088 million in 1995. As we issue shares in 1998, as in connection with the TCG merger and a proposed cross-shareholding arrangement with Telecom Italia, dividend payments will increase, assuming that the company's dividend policy remains the same. To support potential future needs, our Board of Directors has proposed an increase in the number of authorized shares from 2 billion to 6 billion. RISK MANAGEMENT We are exposed to market risk from changes in interest and foreign exchange rates. On a limited basis we use certain derivative financial instruments including interest rate swaps, options, forwards and other derivative contracts to manage these risks. We do not use financial instruments for trading or speculative purposes. All financial instruments are used in accordance with board-approved policies. We use interest rate swaps to manage the impact of interest rate changes on earnings and cash flows and also to lower our overall borrowing costs. We monitor our interest rate risk on the basis of changes in fair value. Assuming a 10% downward shift in interest rates at December 31, 1997, the potential loss in the net change in the fair value of interest rate swaps and the underlying hedged debt would have been $3 million. Assuming a 10% downward shift in interest rates at December 31, 1997, the potential loss in the net change in fair value of unhedged debt would have been $311 million. We use forward and option contracts to reduce our exposure to the risk of adverse changes in currency exchange rates. We are subject to foreign exchange risk related to reimbursements to foreign telephone companies for their portion of the revenues billed by AT&T for calls placed in the U.S. to a foreign country. In addition, we are also subject to foreign exchange risk related to other foreign-currency-denominated transactions. As of December 31, 1997, there was a net unrealized loss on forward contracts of $30 million, calculated based on the difference between the contract rate and the rate available to terminate the contracts. We monitor our foreign exchange rate risk on the basis of changes in fair value. Additional potential losses in the net fair value of these contracts, assuming a 10% appreciation in the U.S. dollar at December 31, 1997, would have been $6 million. Because these contacts are entered into for hedging purposes, we believe that these losses would be largely offset by gains on the underlying firmly committed or anticipated transactions. The estimated potential losses, as discussed above, assume the occurrence of certain adverse market conditions. They do not consider the potential effect of favorable changes in market factors and do not represent projected losses in fair value that we expect to incur. Future impacts would be based on actual developments in global financial markets. Our management does not foresee any significant changes in the strategies used to manage interest rate risk or foreign currency rate risk in the near future. FINANCIAL CONDITION Dollars in Millions At December 31 1997 1996 Total assets $58,635 $55,382 Total assets from continuing operations $57,534 $53,872 Total assets from continuing operations increased $3,662 million, or 6.8%, in 1997 primarily due to increases in property, plant and equipment and long-term receivables, partially offset by decreases in other receivables and accounts receivable. The increase in property, plant and equipment resulted from investment in the network, while both the increase in long-term receivables and the decrease in other receivables are related to notes receivable from UCS. As a result of UCS becoming a discontinued operation, our balance sheet for continuing operations now reflects the receivable from UCS that is expected to be paid by Citibank as well as the external debt associated with procuring debt on behalf of UCS. In total, the receivable from UCS increased $441 million. The decrease in accounts receivable was primarily a result of our lower fourth-quarter consumer revenue. Dollars in Millions At December 31 1997 1996 Total liabilities $35,988 $35,087 Total liabilities increased $901 million, or 2.6%, in 1997 primarily as a result of increases in both deferred income taxes and total outstanding debt. The increase in deferred income taxes was mainly a result of the difference in book and tax basis for our property, plant and equipment, while debt increased due to increased funding requirements for UCS. Dollars in Millions At December 31 1997 1996 Total shareowners' equity $22,647 $20,295 Shareowners' equity increased $2,352 million, or 11.6%, in 1997. The increase was driven by net income, partially offset by 1997 dividends. At December 31 1997 1996 Debt ratio 32.3% 33.7% Our debt ratio declined slightly in 1997 due to the increase in shareowners' equity as discussed above. In 1998 we expect our debt ratio to decrease further as we utilize expected cash proceeds from our pending asset dispositions to retire a certain amount of outstanding debt. A chart appears containing the following information: AT&T Capitalization #: Debt in dollars @: Equity in dollars +: Debt Ratio dollars in billions percent $25 Billion 60% @ # + @ 50% 20 @ 40% 15 + # + # 30% 10 20% 5 10% 0 0% 1995 1996 1997 Debt Equity Debt Ratio 1995 20,709 17,274 54.5% 1996 10,332 20,295 33.7% 1997 10,824 22,647 32.3% LEGISLATIVE AND REGULATORY DEVELOPMENTS The Telecommunications Act of 1996 was designed to foster local exchange competition by establishing a regulatory framework to govern new competitive entry in local and long-distance telecommunications services. The Telecommunications Act also permits Regional Bell Operating Companies (RBOCs) to provide interexchange services originating in any state in its region after demonstrating to the FCC that such provision is in the public interest and satisfying the conditions for developing local competition established by the Telecommunications Act. A number of court decisions have severely restricted implementation of the Telecommunications Act and delayed local service competition. In July 1997 the United States Court of Appeals for the Eighth Circuit vacated the pricing rules that the FCC had adopted to implement the sections of the local competition provisions of the Telecommunications Act applicable to interconnection with local exchange carrier (LEC) networks and the purchase of unbundled network elements and wholesale services from LECs. In October 1997 the Eighth Circuit vacated an FCC Rule that had prohibited incumbent LECs from separating network elements that are combined in the LECs' network, except at the request of the competitor purchasing the elements. These decisions increased the difficulty and costs of providing competitive local service through resale or the use of unbundled network elements purchased from the incumbent LECs. On January 26, 1998, the United States Supreme Court agreed to review the aforementioned decisions of the Eighth Circuit Court of Appeals. Under the normal procedures of the Court, arguments are expected to be heard in October 1998 and a decision is expected sometime in the first half of 1999. On December 31, 1997, the U.S. District Court for the Northern District of Texas issued a memorandum opinion and order holding that the Telecommunications Act's restrictions on the provision of in-region, interLATA service by the RBOCs are unconstitutional. AT&T and other carriers (collectively, "Intervenors") have filed an appeal with the United States Court of Appeals for the Fifth Circuit, and the FCC is expected to do the same. On February 11, 1998, the District Court suspended the effectiveness of its December 31 memorandum opinion and order pending appeal. If the memorandum opinion and order is permitted to take effect, the Telecommunications Act's restrictions on the provisions of in-region, interLATA services will no longer apply to the plaintiffs in the case, SBC Communications, Inc., US West, Inc. and Bell Atlantic Corporation. COMPETITION AT&T currently faces significant competition and expects that the level of competition will continue to increase. The Telecommunications Act permits RBOCs to provide interLATA interexchange services after demonstrating to the FCC that such provision is in the public interest and satisfying the conditions for developing local competition established by the Telecommunications Act. Three RBOCs have petitioned the FCC for permission to provide interLATA interexchange services in one or more states within their home market; to date the FCC has not granted any such petition. To the extent that the RBOCs obtain in-region interLATA authority before the Telecommunications Act's checklist of conditions have been fully or satisfactorily implemented and adequate facilities-based local exchange competition exists, there is a substantial risk that AT&T and other interexchange service providers would be at a disadvantage to the RBOCs in providing both local service and combined service packages. Because it is widely anticipated that substantial numbers of long-distance customers will seek to purchase local, interexchange and other services from a single carrier as part of a combined or full service package, any competitive disadvantage, inability to profitably provide local service at competitive rates, or delays or limitations in providing local service or combined service packages is likely to adversely affect AT&T's future revenues and earnings. In addition, the simultaneous entrance of numerous new competitors for interexchange and combined service packages is likely to adversely affect AT&T's long-distance revenues and could adversely affect earnings. RECENT PRONOUNCEMENTS Effective with the first quarter 1998 reporting we will adopt Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes the standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses) as part of a full set of financial statements. This statement requires that all elements of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Since this standard applies only to the presentation of comprehensive income, it will not have any impact on AT&T's results of operations, financial position or cash flows. Beginning with the 1998 annual report we will also adopt SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes the standards for the manner in which public enterprises are required to report financial and descriptive information about their operating segments. The standard defines operating segments as components of an enterprise for which separate financial information is available and evaluated regularly as a means for assessing segment performance and allocating resources to segments. A measure of profit or loss, total assets and other related information are required to be disclosed for each operating segment. In addition, this standard requires the annual disclosure of: information concerning revenues derived from the enterprise's products or services; countries in which it earns revenues or holds assets, and major customers. FORWARD LOOKING STATEMENTS Except for the historical statements and discussions contained herein, statements contained in this report constitute "forward looking statements" within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward looking statements rely on a number of assumptions concerning future events, and are subject to a number of uncertainties and other factors, many of which are outside our control, that could cause actual results to differ materially from such statements. Readers are cautioned not to put undue reliance on such forward looking statements. These factors and uncertainties include the adoption of balanced and effective rules and regulations by the state public regulatory agencies, our ability to achieve a significant market penetration in new markets and the related costs thereof, and competitive pressures. Shareowners may view our reports filed with the Securities and Exchange Commission for a more detailed description of the uncertainties and other factors that could cause actual results to differ materially from such forward looking statements. We disclaim any intention or obligation to update or revise forward looking statements, whether as a result of new information, future events or otherwise. SEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA (UNAUDITED) AT&T Corp. and Subsidiaries Dollars in millions (except per share amounts)
1997 1996 1995* 1994 1993* 1992 1991* RESULTS OF OPERATIONS Revenues $51,319 $50,546 $48,445 $46,000 $43,780 $42,960 $41,842 Operating income 6,968 8,763 5,184 7,409 6,577 6,246 2,681 Income from continuing operations before cumulative effects of accounting changes 4,472 5,573 3,035 4,260 3,786 3,233 1,199 Income before cumulative effects of accounting changes 4,638 5,908 139 4,710 3,702 3,442 171 Net income(loss) 4,638 5,908 139 4,710 (5,906) 3,442 171 Earnings per common share-basic: Income from continuing operations before cumulative effects of accounting changes 2.75 3.46 1.92 2.74 2.46 2.14 0.82 Income before cumulative effects of accounting changes 2.85 3.67 0.09 3.03 2.41 2.28 0.12 Net income(loss) 2.85 3.67 0.09 3.03 (3.84) 2.28 0.12 Earnings per common share-diluted: Income from continuing operations before cumulative effects of accounting changes 2.74 3.45 1.91 2.72 2.45 2.13 0.81 Income before cumulative effects of accounting changes 2.84 3.66 0.09 3.01 2.39 2.27 0.12 Net income(loss) 2.84 3.66 0.09 3.01 (3.82) 2.27 0.12 Dividends declared per common share 1.32 1.32 1.32 1.32 1.32 1.32 1.32
SEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA (UNAUDITED) AT&T Corp. and Subsidiaries Dollars in millions (except per share amounts)
1997 1996 1995* 1994 1993* 1992 1991* ASSETS AND CAPITAL Property, plant and equipment-net $22,710 $19,736 $16,021 $14,377 $13,653 $13,590 $13,058 Total assets- continuing operations 57,534 53,872 53,726 47,439 41,353 40,124 37,172 Total assets 58,635 55,382 62,228 57,330 50,023 50,521 48,695 Long-term debt 6,826 7,883 8,545 8,938 10,287 12,210 12,167 Total debt 10,824 10,332 20,709 18,492 18,185 17,120 16,756 Shareowners' equity 22,647 20,295 17,274 17,921 13,374 20,313 17,973 Gross capital expenditures 7,213 6,776 4,504 3,361 2,537 2,293 2,424 Employees-continuing operations 127,800 126,600 124,600 115,300 118,100 118,200 115,300 OTHER INFORMATION Operating income as a percentage of revenues 13.6% 17.3% 10.7% 16.1% 15.0% 14.5% 6.4% Income from continuing operations as a percentage of revenues 8.7% 11.0% 6.3% 9.3% 8.6% 7.5% 2.9% Return on average common equity 21.5% 28.0% 0.7% 29.5% (47.1)% 17.6% 0.9% Data at year-end: Stock price per share** $61.31 $41.31 $44.40 $34.46 $36.00 $34.97 $26.83 Book value per common share $13.94 $12.50 $10.82 $11.42 $8.65 $13.31 $12.05 Debt ratio 32.3% 33.7% 54.5% 50.8% 57.6% 45.7% 48.2% * 1995 continuing operations data reflect $3.0 billion of pretax business restructuring and other charges. 1993 net income reflects a $9.6 billion net charge for three accounting changes. 1991 continuing operations data reflect $3.5 billion of pretax business restructuring and other charges. ** Stock prices for 1991-1996 have been restated to reflect the spin-offs of Lucent and NCR.
REPORT OF MANAGEMENT Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and all other financial information included in this report. Management is also responsible for maintaining a system of internal controls as a fundamental requirement for the operational and financial integrity of results. The financial statements, which reflect the consolidated accounts of AT&T Corp. and subsidiaries (AT&T) and other financial information shown, were prepared in conformity with generally accepted accounting principles. Estimates included in the financial statements were based on judgments of qualified personnel. To maintain its system of internal controls, management carefully selects key personnel and establishes the organizational structure to provide an appropriate division of responsibility. We believe it is essential to conduct business affairs in accordance with the highest ethical standards as set forth in the AT&T Code of Conduct. These guidelines and other informational programs are designed and used to ensure that policies, standards and managerial authorities are understood throughout the organization. Our internal auditors monitor compliance with the system of internal controls by means of an annual plan of internal audits. On an ongoing basis, the system of internal controls is reviewed, evaluated and revised as necessary in light of the results of constant management oversight, internal and independent audits, changes in AT&T's business and other conditions. Management believes that the system of internal controls, taken as a whole, provides reasonable assurance that (1) financial records are adequate and can be relied upon to permit the preparation of financial statements in conformity with generally accepted accounting principles and (2) access to assets occurs only in accordance with management's authorizations. The Audit Committee of the Board of Directors, which is composed of directors who are not employees, meets periodically with management, the internal auditors and the independent accountants to review the manner in which these groups of individuals are performing their responsibilities and to carry out the Audit Committee's oversight role with respect to auditing, internal controls and financial reporting matters. Periodically, both the internal auditors and the independent accountants meet privately with the Audit Committee. These accountants also have access to the Audit Committee and its individual members at any time. The consolidated financial statements in this annual report have been audited by Coopers & Lybrand L.L.P., Independent Accountants. Their audits were conducted in accordance with generally accepted auditing standards and include an assessment of the internal control structure and selective tests of transactions. Their report follows. Daniel E. Somers C. Michael Armstrong Senior Executive Vice President, Chairman of the Board, Chief Financial Officer Chief Executive Officer REPORT OF INDEPENDENT ACCOUNTANTS To the Shareowners of AT&T Corp.: We have audited the consolidated balance sheets of AT&T Corp. and subsidiaries (AT&T) at December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareowners' equity and cash flows for the years ended December 31, 1997, 1996 and 1995. These financial statements are the responsibility of AT&T's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AT&T at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for the years ended December 31, 1997, 1996 and 1995, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. 1301 Avenue of the Americas New York, New York January 26, 1998 CONSOLIDATED STATEMENTS OF INCOME AT&T CORP. AND SUBSIDIARIES For the Years Ended December 31 Dollars in millions (except per share amounts) 1997 1996 1995 Revenues................................... $51,319 $50,546 $48,445 Operating Expenses Access and other interconnection........... 16,306 16,332 17,618 Network and other communications services.. 9,316 7,918 7,757 Depreciation and amortization.............. 3,827 2,740 3,520 Selling, general and administrative........ 14,902 14,793 14,366 Total operating expenses................... 44,351 41,783 43,261 Operating income........................... 6,968 8,763 5,184 Other income-net........................... 416 390 284 Interest expense........................... 191 343 490 Income from continuing operations before income taxes............................. 7,193 8,810 4,978 Provision for income taxes................. 2,721 3,237 1,943 Income from continuing operations.......... 4,472 5,573 3,035 Discontinued Operations Income(loss) from discontinued operations (net of taxes of $50 in 1997, $(353) in 1996 and $(1,147) in 1995)............ 100 173 (2,896) Gain on sale of discontinued operations (net of taxes of $43 in 1997 and $138 in 1996)............................ 66 162 - Net income ................................ $ 4,638 $ 5,908 $ 139 Weighted-average common shares and potential common shares (millions)*...... 1,630 1,616 1,592 Per Common Share-Basic: Income from continuing operations.......... $ 2.75 $ 3.46 $ 1.92 Income(loss) from discontinued operations.. 0.06 0.11 (1.83) Gain on sale of discontinued operations.... 0.04 0.10 - Net income................................. $ 2.85 $ 3.67 $ 0.09 Per Common Share-Diluted: Income from continuing operations.......... $ 2.74 $ 3.45 $ 1.91 Income(loss) from discontinued operations.. 0.06 0.11 (1.82) Gain on sale of discontinued operations.... 0.04 0.10 - Net income................................. $ 2.84 $ 3.66 $ 0.09 * Amounts represent the weighted-average shares assuming dilution from the potential exercise of outstanding stock options. Amounts are reduced by 5 million, 6 million and 8 million shares for 1997, 1996 and 1995, respectively, assuming no dilution. The notes on pages 46 through 71 are an integral part of the consolidated financial statements. CONSOLIDATED BALANCE SHEETS AT&T CORP. AND SUBSIDIARIES At December 31 Dollars in millions 1997 1996 ASSETS Cash and cash equivalents $ 145 $ - Receivables, less allowances of $977 and $942 Accounts receivable 8,573 8,969 Other receivables 5,684 6,140 Deferred income taxes 1,252 1,266 Other current assets 525 698 TOTAL CURRENT ASSETS 16,179 17,073 Property, plant and equipment-net 22,710 19,736 Licensing costs, net of accumulated amortization of $1,076 and $913 8,329 8,071 Investments 3,857 3,875 Long-term receivables 1,794 872 Prepaid pension costs 2,156 1,933 Other assets 2,509 2,312 Net assets of discontinued operations 1,101 1,510 TOTAL ASSETS $58,635 $55,382 LIABILITIES Accounts payable $ 6,243 $ 6,157 Payroll and benefit-related liabilities 2,348 2,614 Debt maturing within one year 3,998 2,449 Dividends payable 538 536 Other current liabilities 3,815 4,395 TOTAL CURRENT LIABILITIES 16,942 16,151 Long-term debt 6,826 7,883 Long-term benefit-related liabilities 3,142 3,037 Deferred income taxes 5,711 4,827 Other long-term liabilities and deferred credits 3,367 3,189 TOTAL LIABILITIES 35,988 35,087 SHAREOWNERS' EQUITY Common shares, par value $1 per share 1,624 1,623 Authorized shares: 2,000,000,000 Outstanding shares: 1,624,213,505 at December 31, 1997; 1,623,487,646 at December 31, 1996 Additional paid-in capital 15,751 15,697 Guaranteed ESOP obligation (70) (96) Foreign currency translation adjustments (28) (7) Retained earnings 5,370 3,078 TOTAL SHAREOWNERS' EQUITY 22,647 20,295 TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $58,635 $55,382 The notes on pages 46 through 71 are an integral part of the consolidated financial statements. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY AT&T CORP. AND SUBSIDIARIES For the Years Ended December 31 Dollars in millions 1997 1996 1995 Common Shares Balance at beginning of year $ 1,623 $ 1,596 $ 1,569 Shares issued, net: Under employee plans 1 19 13 Under shareowner plans - 8 13 Other - - 1 Balance at end of year 1,624 1,623 1,596 Additional Paid-In Capital Balance at beginning of year 15,697 16,614 15,825 Shares issued (acquired), net: Under employee plans (24) 975 598 Under shareowner plans 9 434 687 Other 69 - 31 Dividends declared - - (527) Spin-offs of Lucent and NCR - (2,326) - Balance at end of year 15,751 15,697 16,614 Guaranteed ESOP Obligation Balance at beginning of year (96) (254) (305) Amortization 26 52 51 Assumption by Lucent - 106 - Balance at end of year (70) (96) (254) Foreign Currency Translation Adjustments Balance at beginning of year (7) 5 145 Translation adjustments (21) (33) (140) Spin-offs of Lucent and NCR - 21 - Balance at end of year (28) (7) 5 Retained Earnings (Deficit) Balance at beginning of year 3,078 (687) 687 Net income 4,638 5,908 139 Dividends declared (2,145) (2,132) (1,570) Treasury shares issued at less than cost (187) - - Other changes (14) (11) 57 Balance at end of year 5,370 3,078 (687) Total Shareowners' Equity $22,647 $20,295 $17,274 In March 1990 we issued 13.4 million new shares of common stock in connection with the establishment of an ESOP feature for the nonmanagement savings plan. The shares are being allocated to plan participants over ten years commencing in July 1990 as contributions are made to the plan. We have 100 million authorized shares of preferred stock at $1 par value. No preferred stock is currently issued or outstanding. The notes on pages 46 through 71 are an integral part of the consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS AT&T CORP. AND SUBSIDIARIES For the Years Ended December 31 Dollars in millions 1997 1996 1995 OPERATING ACTIVITIES Net income $ 4,638 $ 5,908 $ 139 Add:(Income)loss from discontinued operations (100) (173) 2,896 Gain on sale of discontinued operations (66) (162) - Income from continuing operations 4,472 5,573 3,035 Adjustments to reconcile net income to net cash provided by operating activities of continuing operations: Restructuring and other charges - - 3,023 Depreciation and amortization 3,827 2,740 2,586 Provision for uncollectibles 1,957 1,938 1,613 Increase in accounts receivable (1,431) (2,165) (2,220) Increase in accounts payable 16 513 872 Net increase in other operating assets and liabilities (787) (1,079) (87) Other adjustments for noncash items-net 383 355 (624) NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 8,437 7,875 8,198 INVESTING ACTIVITIES Capital expenditures (7,143) (6,334) (4,597) Proceeds from sale or disposal of property, plant and equipment 169 145 204 (Increase)decrease in finance assets (465) 3,499 1,845 Acquisitions of licenses (435) (267) (1,978) Net decrease(increase) in investments 109 (140) 9 Dispositions(acquisitions), net of cash acquired 1,513 2,145 (3,406) Other investing activities-net (155) (23) (240) NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING OPERATIONS (6,407) (975) (8,163) FINANCING ACTIVITIES Proceeds from long-term debt issuances - - 2,392 Retirements of long-term debt (662) (1,236) (2,137) (Acquisition) issuance of common shares (163) 1,293 1,214 Dividends paid (2,142) (2,122) (2,088) Increase(decrease) in short-term borrowings-net 1,114 (5,301) 1,976 Other financing activities-net 52 1,986 100 NET CASH (USED IN)PROVIDED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS (1,801) (5,380) 1,457 Net cash used in discontinued operations (84) (1,595) (1,544) Net increase(decrease) in cash and cash equivalents 145 (75) (52) Cash and cash equivalents at beginning of year - 75 127 Cash and cash equivalents at end of year $ 145 $ - $ 75 The notes on pages 46 through 71 are an integral part of the consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AT&T CORP. AND SUBSIDIARIES (AT&T) (Dollars in millions unless otherwise noted, except per share amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include all majority-owned subsidiaries. Investments in which we exercise significant influence but which we do not control (generally a 20% - 50% ownership interest) are accounted for under the equity method of accounting. This represents the majority of our investments. Generally, investments in which we have less than a 20% ownership interest are accounted for under the cost method of accounting. CURRENCY TRANSLATION For operations outside of the U.S. that prepare financial statements in currencies other than the U.S. dollar, we translate income statement amounts at average exchange rates for the year and we translate assets and liabilities at year-end exchange rates. We present these translation adjustments as a separate component of shareowners' equity. REVENUE RECOGNITION We recognize wireline and wireless services revenue based upon minutes of traffic processed and contracted fees. Generally, we recognize products and other services revenue in accordance with contract terms. ADVERTISING AND PROMOTIONAL COSTS We expense costs of advertising and promotions, including checks used to acquire customers, as incurred. Advertising and promotional expenses were $1,985, $2,526 and $2,148 in 1997, 1996 and 1995, respectively. INVESTMENT TAX CREDITS We amortize investment tax credits as a reduction to the provision for income taxes over the useful lives of the property that produced the credits. EARNINGS PER SHARE We calculate earnings per share in accordance with Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share." We use the weighted-average number of common shares outstanding during each period to compute basic earnings per common share. Diluted earnings per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding. Dilutive potential common shares are additional common shares assumed to be exercised. CASH EQUIVALENTS We consider all highly liquid investments with original maturities of generally three months or less to be cash equivalents. PROPERTY, PLANT AND EQUIPMENT We state property, plant and equipment at cost, unless impaired, and determine depreciation based upon the assets' estimated useful lives using either the group or unit method. The group method is used for most depreciable assets. When we sell or retire assets that were depreciated using the group method, we deduct the cost from property, plant and equipment and accumulated depreciation. The unit method is used primarily for large computer systems and support assets. When we sell assets that were depreciated using the unit method, we include the related gains or losses in operating results. We use accelerated depreciation methods primarily for digital equipment used in the telecommunications network, except for switching equipment placed in service before 1989 and certain high technology computer processing equipment. All other plant and equipment, including capitalized software, is depreciated on a straight-line basis. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. LICENSING COSTS Licensing costs are costs incurred to develop or acquire cellular, personal communications services (PCS) and messaging licenses. Generally, amortization begins with the commencement of service to customers and is computed using the straight-line method over a period of 40 years. GOODWILL Goodwill is the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for as purchases. We amortize goodwill on a straight-line basis over the periods benefited ranging from five to 40 years. Goodwill is reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount, a loss is recognized for the difference between the fair value and carrying value of the asset. DERIVATIVE FINANCIAL INSTRUMENTS We use various financial instruments, including derivative financial instruments, for purposes other than trading. We do not use derivative financial instruments for speculative purposes. Derivatives, used as part of our risk management strategy, must be designated at inception as a hedge and measured for effectiveness both at inception and on an ongoing basis. Gains and losses related to qualifying hedges of foreign currency firm commitments are deferred in other assets or liabilities and recognized as part of the underlying transactions as they occur. All other foreign exchange contracts are marked to market on a current basis and the respective gains or losses are recognized in other income-net. Interest rate differentials associated with interest rate swaps used to hedge AT&T's debt obligations are recorded as an adjustment to interest payable or receivable with the offset to interest expense over the life of the swaps. If we terminate an interest rate swap agreement, the gain or loss is recorded as an adjustment to the basis of the underlying asset or liability and amortized over the remaining life. Cash flows from financial instruments are classified in the Consolidated Statements of Cash Flows under the same categories as the cash flows from the related assets, liabilities or anticipated transactions. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ from those estimates. Estimates are used when accounting for certain items such as long-term contracts, allowance for doubtful accounts, depreciation and amortization, employee benefit plans, taxes, restructuring reserves and contingencies. CONCENTRATIONS As of December 31, 1997, we do not have any significant concentration of business transacted with a particular customer, supplier or lender that could, if suddenly eliminated, severely impact our operations. We also do not have a concentration of available sources of labor, services, or licenses or other rights that could, if suddenly eliminated, severely impact our operations. RECLASSIFICATIONS We reclassified certain amounts for previous years to conform with the 1997 presentation. 2. DISCONTINUED OPERATIONS On September 20, 1995, AT&T announced a plan, subject to certain conditions, to separate into three independent, publicly held, global companies: communications services (AT&T), communications systems and technologies (Lucent Technologies Inc., "Lucent") and transaction-intensive computing (NCR Corporation, "NCR"). In April 1996 Lucent sold 112 million shares of common stock in an initial public offering (IPO), representing 17.6% of the Lucent common stock outstanding. Because of AT&T's plan to spin off its remaining 82.4% interest in Lucent, the sale of the Lucent stock was recorded as an equity transaction, resulting in an increase in AT&T's additional paid-in capital at the time of the IPO. In addition, in connection with the restructuring, Lucent assumed $3.7 billion of AT&T debt in 1996. On September 30, 1996, AT&T distributed to AT&T shareowners of record as of September 17, 1996, the remaining Lucent common stock held by AT&T. The shares were distributed on the basis of .324084 of a share of Lucent for each AT&T share outstanding. On October 1, 1996, AT&T sold its remaining interest in AT&T Capital for approximately $1.8 billion, resulting in a gain of $162, or $.10 per share, after taxes. On December 31, 1996, AT&T also distributed all of the outstanding common stock of NCR to AT&T shareowners of record as of December 13, 1996. The shares were distributed on the basis of .0625 of a share of NCR for each AT&T share outstanding on the record date. As a result of the Lucent and NCR distributions, AT&T's shareowners' equity was reduced by $2.2 billion. The distributions of the Lucent and NCR common stock to AT&T shareowners were noncash transactions totaling $4.8 billion which did not affect AT&T's results of operations. On July 1, 1997, AT&T sold its submarine systems business (SSI) to Tyco International Ltd. for approximately $850, resulting in an after-tax gain of $66, or $.04 per share. On October 20, 1997, AT&T announced its plans to sell AT&T Universal Card Services, Inc. (UCS). On December 17, 1997, AT&T entered into an agreement with Citicorp to sell UCS for approximately $3.5 billion. In addition, the two companies signed a 10-year co-branding and joint-marketing agreement. The sale is subject to regulatory approval and is expected to be completed by the second quarter of 1998. The consolidated financial statements of AT&T have been restated to reflect the dispositions of Lucent, NCR, AT&T Capital, SSI and other businesses as well as the pending sale of UCS as discontinued operations. Accordingly, the revenues, costs and expenses, assets and liabilities, and cash flows of these discontinued operations have been excluded from the respective captions in the Consolidated Statements of Income, Consolidated Balance Sheets and Consolidated Statements of Cash Flows, and have been reported through the dates of disposition as "Income(loss) from discontinued operations," net of applicable income taxes; as "Net assets of discontinued operations," and as "Net cash used in discontinued operations" for all periods presented. In 1997 we adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Among other provisions, this standard requires that in connection with the transfer of financial assets, liabilities incurred should be measured at fair value and retained interests should be recorded as a portion of the original carrying amount of the transferred financial assets. This standard applies only to UCS and resulted in a substantial benefit to income from discontinued operations for the year. Summarized financial information for the discontinued operations is as follows: 1997 1996 1995 Revenues $1,942 $23,979 $31,164 Income(loss) before income taxes 150 (180) (4,043) Net income(loss) 100 173 (2,896) Current assets 7,734 7,590 Total assets 7,808 7,979 Current liabilities* 5,602 6,190 Total liabilities* 6,707 6,469 Net assets of discontinued operations $1,101 $ 1,510 *Current liabilities include $5,224 and $5,706 of debt maturing within one year and total liabilities include an additional $1,093 and $170 of long-term debt at December 31, 1997, and December 31, 1996, respectively, all of which are payable to AT&T. The income(loss) before income taxes includes allocated interest expense of $45 and $134 in 1996 and 1995, respectively. Interest expense was allocated to discontinued operations based on a ratio of net assets of discontinued operations to total AT&T consolidated assets. No interest expense was allocated to discontinued operations in 1997 due to the immateriality of the amounts; however, UCS recorded direct interest expense of $297, $383 and $626 in 1997, 1996 and 1995, respectively, primarily related to the amounts payable to AT&T. 3. NEW ACCOUNTING PRONOUNCEMENTS Effective with the first quarter 1998 we will adopt SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes the standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses) as part of a full set of financial statements. This statement requires that all elements of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Since this standard applies only to the presentation of comprehensive income, it will not have any impact on AT&T's results of operations, financial position or cash flows. Beginning with the 1998 annual report we will also adopt SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes the standards for the manner in which public enterprises are required to report financial and descriptive information about their operating segments. This standard defines operating segments as components of an enterprise for which separate financial information is available and evaluated regularly as a means for assessing segment performance and allocating resources to segments. A measure of profit or loss, total assets and other related information are required to be disclosed for each operating segment. In addition, this standard requires the annual disclosure of: information concerning revenues derived from the enterprise's products or services; countries in which it earns revenue or holds assets, and major customers. 4. LIN BROADCASTING In 1995 we acquired the remaining 48% of LIN Broadcasting Corporation (LIN) for approximately $3.3 billion. The purchase price was allocated to the fair value of assets acquired of $4.0 billion and the fair value of liabilities assumed of $.7 billion. On August 12, 1997, AT&T entered into an agreement to sell its 45% common share interest in LIN Television Corporation, a subsidiary of LIN, for approximately $641 to Hicks, Muse, Tate and Furst Incorporated ("Hicks Muse"). Subsequently, in response to a competitive offer, Hicks Muse increased their bid to $742. The sale is subject to various conditions, including approval by the Federal Communications Commission. If approved, the sale is expected to close in early 1998. In a separate agreement, AT&T agreed to sell WOOD-TV, its television station in Grand Rapids, Michigan, for approximately $123, subject to certain adjustments, upon the completion of the sale of its interest in LIN. 5. SUPPLEMENTARY FINANCIAL INFORMATION SUPPLEMENTARY INCOME STATEMENT INFORMATION For the Years Ended December 31 1997 1996 1995 INCLUDED IN DEPRECIATION AND AMORTIZATION Amortization of licensing costs $163 $170 $133 Amortization of goodwill 51 52 74 INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE Research and development expenses $829 $822 $732 OTHER INCOME-NET Interest income $ 28 $ 18 $ 38 Minority interests in earnings of subsidiaries (12) (15) (17) Net equity earnings from investments 35 67 103 Officers' life insurance 68 74 73 Sale/exchange of cellular investments 75 158 64 Gain on sale of Skynet 97 - - Miscellaneous-net 125 88 23 Total other income-net $416 $390 $284 DEDUCTED FROM INTEREST EXPENSE Capitalized interest $254 $193 $107 SUPPLEMENTARY BALANCE SHEET INFORMATION At December 31 1997 1996 PROPERTY, PLANT AND EQUIPMENT Machinery, electronic and other equipment $ 37,433 $ 32,761 Buildings and improvements 6,744 6,251 Land and improvements 386 373 Total property, plant and equipment 44,563 39,385 Accumulated depreciation (21,853) (19,649) Property, plant and equipment-net $ 22,710 $ 19,736 OTHER ASSETS Unamortized goodwill $ 1,277 $ 1,325 Deferred charges 724 477 Other 508 510 Total other assets $ 2,509 $ 2,312 SUPPLEMENTARY CASH FLOW INFORMATION For the Years Ended December 31 1997 1996 1995 Interest payments net of amounts capitalized $ 207 $ 364 $ 436 Income tax payments 2,414 2,136 2,016 6. BUSINESS RESTRUCTURING AND OTHER CHARGES In the fourth quarter of 1995 we recorded a pretax charge of $3,023 to cover restructuring costs of $2,301 and asset impairments and other charges of $722. This charge included plans to exit certain proprietary network and messaging services; restructure customer service organizations; consolidate call servicing centers; exit certain satellite services; reorganize corporate support functions such as information systems, human resources and financial operations, and restructure certain international operations. As part of our plan to sell certain businesses and to restructure our operations, restructuring liabilities of $1,712 were recorded for employee separation costs, costs associated with early termination of building leases and other items. In addition, asset impairments of $567 (which directly reduced the carrying value of the related asset balances) and $22 of benefit plan losses were recorded. The 1995 restructure charge of $2,301 included separation costs for nearly 17,000 employees, which included approximately 12,000 management and 5,000 occupational employees. As of December 31, 1997, approximately 6,800 management employees and 2,300 occupational employees have been separated. Of the 6,800 management separations, approximately 4,300 accepted voluntary severance packages. During 1996 and 1997 we completed the restructuring of our proprietary network and messaging services business, closed several call servicing centers, consolidated customer care centers, sold certain international operations and reorganized certain corporate support functions. The implementation of certain restructuring activities are occurring at a slower pace than planned. There have been delays in exiting certain businesses and reorganizing corporate support functions, in part to ensure customer satisfaction during this transition period. However, certain facility costs have payment terms extending beyond 1998. We believe that the balance is adequate to complete these plans. On January 26, 1998, we announced a voluntary retirement incentive program to be offered to managers during the second quarter of 1998. The expected acceptance rate of 10,000 to 11,000 employees for the voluntary retirement incentive offer may impact the utilization of the remaining 1995 restructuring reserve balance. Another 5,000 to 7,000 employees will leave through a combination of managed attrition and previously announced workforce reductions. The following table displays a rollforward of the liabilities for business restructuring from December 31, 1995, to December 31, 1997: 1996 ---------------------------- Dec. 31, Dec. 31, 1995 Amounts 1996 Type of Cost Balance Additions Utilized Balance Employee separations $ 925 $ - $(319) $ 606 Facility closings 761 - (233) 528 Other 406 - (152) 254 Total $2,092 $ - $(704) $1,388 - --------------------------------------------------------------------------- 1997 ---------------------------- Dec. 31, Dec. 31, 1996 Amounts 1997 Type of Cost Balance Additions Utilized Balance Employee separations $ 606 $ - $(193) $413 Facility closings 528 - (94) 434 Other 254 - (194) 60 Total $1,388 $ - $(481) $907 - --------------------------------------------------------------------------- 1997 utilization includes $100 reversal of pre-1995 reserves. 1996 utilization includes $112 of net transfers to Lucent and NCR. The balance at December 31, 1997, includes $180 of pre-1995 charges primarily related to excess space in various leased facilities and is expected to be fully utilized over the remaining terms of the leases. The 1995 charge of $722 for asset impairments and other charges included $668 for writing down certain impaired assets, including the write-down in the value of some unnecessary network facilities, the write-down of non-strategic wireless assets and the reduction in value of some investments. There were no assets to be disposed of or sold included in these write-downs. The charge also included $54 of other items, none of which individually exceed 1% of the total charge. The total pretax charge of $3,023 for 1995 was recorded as $844 in network and other communications services expenses; $934 in depreciation and amortization expenses, and $1,245 in selling, general and administrative expenses. If viewed by type of cost, the combined charges reflect $950 for employee separations and other related items; $1,235 for asset write-downs; $497 for closing, selling and consolidating facilities; and $341 for other items. The total charge reduced income from continuing operations by $2,032, or diluted earnings per share by $1.28 in 1995. In addition, charges of $1,172 (net of taxes) in the third quarter of 1995 and $2,149 (net of taxes) in the fourth quarter of 1995 are reflected in the loss from discontinued operations. These charges reduced income from discontinued operations by a total of $3,321, or diluted earnings per share by $2.08 in 1995. 7. INCOME TAXES The following table shows the principal reasons for the difference between the effective income tax rate and the United States federal statutory income tax rate: For the Years Ended December 31 1997 1996 1995 U.S. federal statutory income tax rate 35% 35% 35% Federal income tax at statutory rate $2,517 $3,084 $1,743 Amortization of investment tax credits (14) (21) (35) State and local income taxes, net of federal income tax effect 182 272 179 Amortization of intangibles 20 13 62 Foreign rate differential 117 131 (11) Taxes on repatriated and accumulated foreign income, net of tax credits (32) 19 17 Legal entity restructuring - (195) - Research credits (63) (13) (24) Other differences-net (6) (53) 12 Provision for income taxes $2,721 $3,237 $1,943 Effective income tax rate 37.8% 36.7% 39.0% The U.S. and foreign components of income before income taxes and the provision for income taxes are presented in this table: For the Years Ended December 31 1997 1996 1995 INCOME BEFORE INCOME TAXES United States $7,311 $9,013 $5,465 Foreign (118) (203) (487) Total $7,193 $8,810 $4,978 PROVISION FOR INCOME TAXES CURRENT Federal $1,561 $2,291 $1,922 State and local 192 397 383 Foreign 49 25 1 $1,802 $2,713 $2,306 DEFERRED Federal $ 851 $ 511 $ (221) State and local 89 23 (108) Foreign (5) 11 1 $ 935 $ 545 $ (328) Deferred investment tax credits (16) (21) (35) Provision for income taxes $2,721 $3,237 $1,943 Deferred income tax liabilities are taxes we expect to pay in future periods. Similarly, deferred income tax assets are recorded for expected reductions in taxes payable in future periods. Deferred income taxes arise because of differences in the book and tax bases of certain assets and liabilities. Deferred income tax liabilities and assets consist of the following: At December 31 1997 1996 LONG-TERM DEFERRED INCOME TAX LIABILITIES Property, plant and equipment $6,204 $5,302 Investments 319 96 Other 1,185 1,403 Total long-term deferred income tax liabilities $7,708 $6,801 LONG-TERM DEFERRED INCOME TAX ASSETS Business restructuring $ 162 $ 195 Net operating loss/credit carryforwards 273 220 Employee pensions and other benefits-net 1,026 1,298 Reserves and allowances 93 120 Other 654 305 Valuation allowance (211) (164) Total net long-term deferred income tax assets $1,997 $1,974 Net long-term deferred income tax liabilities $5,711 $4,827 CURRENT DEFERRED INCOME TAX LIABILITIES Total current deferred income tax liabilities $ 175 $ 117 CURRENT DEFERRED INCOME TAX ASSETS Business restructuring $ 225 $ 249 Net operating loss/credit carryforwards 5 3 Employee pensions and other benefits 304 523 Reserves and allowances 629 594 Other 264 14 Total net current deferred income tax assets $1,427 $1,383 Net current deferred income tax assets $1,252 $1,266 At December 31, 1997, we had net operating loss carryforwards (tax-effected) for federal and state income tax purposes of $32 and $76, respectively, expiring through 2012. We also had foreign net operating loss carryforwards (tax-effected) of $140, of which $130 has no expiration date, with the balance expiring by the year 2002 as well as federal tax credit carryforwards of $30 which are not subject to expiration. We recorded a valuation allowance to reflect the estimated amount of deferred tax assets which, more likely than not, will not be realized. 8. POSTRETIREMENT BENEFITS Our benefit plans for retirees include health care benefits, life insurance coverage and telephone concessions. Postretirement contributions to trust funds are determined using the attained-age-normal cost method for health care benefits and the aggregate cost method for life insurance plans. Immediately following the spin-off of Lucent on September 30, 1996, Lucent established separate postretirement benefit plans, and a share of the postretirement benefit obligations and postretirement benefit assets held in trust were transferred from AT&T to Lucent based on methods and assumptions that were agreed to by both companies. Adjustments to the estimated assets and postretirement benefit obligations that were transferred to Lucent were not material in 1997. Subsequent adjustments, if any, are also expected to be immaterial. This table shows the components of the net postretirement benefit cost: For the Years Ended December 31 1997 1996 1995 Service cost-benefits earned during the period $ 56 $ 53 $ 40 Interest cost on accumulated postretirement benefit obligation 278 263 258 Expected return on plan assets* (120) (99) (78) Amortization of unrecognized prior service costs 39 39 23 Amortization of net loss(gain) - 3 (3) Net postretirement benefit cost $ 253 $259 $240 * The actual return on plan assets was $358 in 1997, $313 in 1996 and $256 in 1995. The expected long-term rate of return on plan assets was 9.0% in 1997, 1996 and 1995. Prior service costs are amortized primarily on a straight-line basis over the average remaining service period of active employees. We had approximately 40,400, 37,900 and 34,500 retirees as of December 31, 1997, 1996, and 1995, respectively. Our plan assets consist primarily of listed stocks, corporate and governmental debt, cash and cash equivalents, and life insurance contracts. The following table shows the funded status of our postretirement benefit plans reconciled with the amounts recognized in the Consolidated Balance Sheets: At December 31 1997 1996 Accumulated postretirement benefit obligation: Retirees $2,655 $2,244 Fully eligible active plan participants 651 453 Other active plan participants 1,050 1,042 Total accumulated postretirement benefit obligation 4,356 3,739 Plan assets at fair value 1,969 1,566 Unfunded postretirement obligation 2,387 2,173 Less: Unrecognized prior service costs 166 206 Unrecognized net gain (227) (510) Accrued postretirement benefit obligation $2,448 $2,477 We made these assumptions in valuing our postretirement benefit obligation at December 31: 1997 1996 Weighted-average discount rate 7.0% 7.5% Assumed rate of increase in the per capita cost of covered health care benefits 5.3% 5.6% We assumed that the growth in the per capita cost of covered health care benefits (the health care cost trend rate) would gradually decline after 1997 to 4.8% by the year 2008 and then remain level. This assumption greatly affects the amounts reported. To illustrate, increasing the assumed trend rate by 1% in each year would raise our accumulated postretirement benefit obligation at December 31, 1997, by $218 and our 1997 postretirement benefit costs by $18. 9. EMPLOYEE BENEFIT PLANS PENSION PLANS We sponsor noncontributory defined benefit plans covering the majority of our employees. Benefits for management employees are principally based on career-average pay. Benefits for occupational employees are not directly related to pay. Pension contributions are principally determined using the aggregate cost method and are primarily made to trust funds held for the sole benefit of plan participants. Immediately following the spin-off of Lucent on September 30, 1996, Lucent established separate defined benefit plans, and a share of the pension obligations and pension assets held in trust were transferred from AT&T to Lucent based on methods and assumptions that were agreed to by both companies. Adjustments to the estimated asset and pension obligation amounts that were transferred to Lucent were not material in 1997. Subsequent adjustments, if any, are also expected to be immaterial. We compute pension cost using the projected unit credit method and assumed a long-term rate of return on plan assets of 9.0% in 1997, 1996 and 1995. Pension cost includes the following components: For the Years Ended December 31 1997 1996 1995 Service cost-benefits earned during the period $ 305 $ 295 $ 200 Interest cost on projected benefit obligation 946 861 747 Amortization of unrecognized prior service costs 114 99 90 Credit for expected return on plan assets* (1,371) (1,195) (1,043) Amortization of transition asset (181) (183) (193) Charges for special pension benefits 5 - 58 Net pension credit $ (182) $ (123) $ (141) *The actual return on plan assets was $3,464 in 1997, $2,981 in 1996 and $1,044 in 1995. The net pension credit in 1995 includes a one-time charge of $58 for early retirement options and curtailments. This table shows the funded status of the defined benefit plans: At December 31 1997 1996 Actuarial present value of accumulated benefit obligation, including vested benefits of $13,123 and $10,083 $14,150 $11,520 Plan assets at fair value $20,513 $17,680 Less: Actuarial present value of projected benefit obligation 14,481 12,380 Excess of assets over projected benefit obligation 6,032 5,300 Unrecognized prior service costs 904 766 Unrecognized transition asset (708) (889) Unrecognized net gain (4,130) (3,303) Net minimum liability of nonqualified plans (103) (51) Prepaid pension costs $ 1,995 $ 1,823 We used these rates and assumptions to calculate the projected benefit obligation: At December 31 1997 1996 Weighted-average discount rate 7.0% 7.5% Rate of increase in future compensation levels 4.5% 5.0% The prepaid pension costs shown above are net of pension liabilities for plans where accumulated plan benefits exceed assets. Such liabilities, that are not material, are included in other liabilities in the Consolidated Balance Sheets. We are amortizing over 15.9 years the unrecognized transition asset related to our 1986 adoption of SFAS No. 87, "Employers' Accounting for Pensions." We amortize prior service costs primarily on a straight-line basis over the average remaining service period of active employees. Our plan assets consist primarily of listed stocks (including $75 and $56 of AT&T common stock at December 31, 1997, and 1996, respectively), corporate and governmental debt, real estate investments and cash and cash equivalents. SAVINGS PLANS We sponsor savings plans for the majority of our employees. The plans allow employees to contribute a portion of their pretax and/or after-tax income in accordance with specified guidelines. We match a percentage of the employee contributions up to certain limits. Our contributions amounted to $197 in 1997, $178 in 1996 and $156 in 1995. 10. STOCK-BASED COMPENSATION PLANS Under the 1997 Long-Term Incentive Program, which was effective June 1, 1997, we grant stock options, performance shares, restricted stock and other awards. There are 100 million shares of common stock available for grant with a maximum of 15 million common shares that may be used for awards other than stock options. The exercise price of any stock option is equal to the stock price when the option is granted. Generally, the options vest over three years and are exercisable up to ten years from the date of grant. Under the 1987 Long-Term Incentive Program, which expired in April 1997, we granted the same awards, and on January 1 of each year 0.6% of the outstanding shares of our common stock became available for grant. Under the 1997 Long-Term Incentive Program, performance share units are awarded to key employees in the form of either common stock or cash at the end of a three-year period based on AT&T's total shareholder return as measured against a peer group of industry competitors. Under the 1987 Long- Term Incentive Program, performance share units with the same terms were also awarded to key employees based on AT&T's return-to-equity performance compared with a target. On August 1, 1997, substantially all of our employees were granted a stock option award to purchase 100 shares representing a total of 12.5 million shares of our common stock. The options vest after three years and are exercisable up to ten years from the grant date. Under the AT&T 1996 Employee Stock Purchase Plan (Plan), which was effective July 1, 1996, we are authorized to issue up to 50 million shares of common stock to our eligible employees. Under the terms of the Plan, employees may have up to 10% of their earnings withheld to purchase AT&T's common stock. The purchase price of the stock on the date of exercise is 85% of the average high and low sale prices of shares on the New York Stock Exchange for that day. Under the Plan, we sold approximately 3 million shares to employees in both 1997 and 1996. We apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for our plans. Accordingly, no compensation expense has been recognized for our stock-based compensation plans other than for our performance-based and restricted stock awards, SARs, and prior to July 1, 1996, for the stock purchase plan for former McCaw Cellular Communications, Inc. employees. Compensation costs charged against income were $94 and $40 in 1997 and 1996, respectively. A summary of option transactions is shown below: Weighted- Weighted- Average Average Exercise Exercise Shares in Thousands 1997 Price 1996 Price 1995 Outstanding at January 1 46,910 $33.89 47,689 $43.21 40,285 Lucent and NCR spin-off adjustments - - 22,678 - - Options granted 36,485 $38.81 9,132 $45.53 13,276 Options and SARs exercised (10,832) $24.89 (10,708) $19.16 (8,181) Average exercise price $29.39 Options assumed in purchase of LIN - - - - 3,382 Options canceled or forfeited: Lucent and NCR spin-offs - - (16,179) $37.25 - Other employee plans (4,058) $40.47 (5,702) $37.12 (1,073) At December 31: Options outstanding 68,505 $37.50 46,910 $33.89 47,689 Average exercise price $43.21 Options exercisable 22,981 $33.26 28,034 $28.81 28,775 Shares available for grant 85,859 - 19,693 - 17,524 Effective on the dates of spin-off of Lucent and NCR, AT&T stock options held by Lucent and NCR employees were canceled. For the holders of unexercised AT&T stock options, the number of options was adjusted and all exercise prices were decreased immediately following each spin-off date to preserve the economic values of the options that existed prior to those dates. During 1997 402,057 SARs were exercised and no SARs were granted. At December 31, 1997, 341,783 SARs remained unexercised, all of which were exercisable. AT&T has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." If AT&T had elected to recognize compensation costs based on the fair value at the date of grant for awards in 1997, 1996 and 1995, consistent with the provisions of SFAS No. 123, AT&T's net income and earnings per common share would have been reduced to the following pro forma amounts: For the Years Ended December 31 1997 1996 1995 Income from continuing operations $4,384 $5,502 $ 3,022 Income(loss) from discontinued operations 99 146 (2,902) Gain on sale of discontinued operations 66 162 - Net income $4,549 $5,810 $ 120 Earnings per common share-basic: Continuing operations $ 2.70 $ 3.42 $ 1.91 Discontinued operations 0.06 0.09 (1.83) Gain on sale of discontinued operations 0.04 0.10 - Net income $ 2.80 $ 3.61 $ 0.08 Earnings per common share-diluted: Continuing operations $ 2.69 $ 3.41 $ 1.90 Discontinued operations 0.06 0.09 (1.82) Gain on sale of discontinued operations 0.04 0.10 - Net income $ 2.79 $ 3.60 $ 0.08 Without the effect of pro forma costs related to the conversion of options in the Lucent and NCR spin-offs, pro forma income from continuing operations was $5,532, or $3.42 per diluted common share in 1996. The pro forma effect on net income for 1997, 1996 and 1995 may not be representative of the pro forma effect on net income of future years because the SFAS No. 123 method of accounting for pro forma compensation expense has not been applied to options granted prior to January 1, 1995. The weighted-average fair values at date of grant for options granted during 1997, 1996 and 1995 were $9.09, $13.12 and $14.02, respectively, and were estimated using the Black-Scholes option-pricing model. The risk-free interest rates applied for 1997, 1996 and 1995 were 6.16%, 6.11% and 6.44%, respectively. The following assumptions were applied for periods before the Lucent spin-off, subsequent to the Lucent spin-off through December 31, 1996, and for 1997, respectively: (i) expected dividend yields of 2.4%, 2.8% and 2.2%, (ii) expected volatility rates of 19.0%, 21.0% and 21.8%, and (iii) expected lives of 5.0, 4.5 and 4.5 years. The following table summarizes information about stock options outstanding at December 31, 1997: Options Outstanding Options Exercisable Weighted- Number Average Weighted- Number Weighted- Range of Outstanding at Remaining Average Exercisable at Average Exercise Dec. 31, 1997 Contractual Exercise Dec. 31, 1997 Exercise Prices (in thousands) Life Price (in thousands) Price $ 1.11 - $15.76 318 1.9 $13.64 318 $13.64 15.83 - 27.12 6,611 3.5 24.40 6,611 24.40 27.16 - 34.95 7,890 6.4 34.16 5,088 24.50 35.20 - 36.74 6,207 5.7 35.61 4,495 35.54 36.75 12,501 9.4 36.75 - 36.75 36.76 - 39.30 4,229 6.0 37.41 3,304 37.20 39.31 17,810 9.0 39.31 22 39.31 39.32 - 47.37 11,813 7.6 45.15 3,143 45.19 48.28 - 60.00 1,126 9.9 54.58 - - 68,505 7.5 $37.50 22,981 $33.26 11. DEBT OBLIGATIONS DEBT MATURING WITHIN ONE YEAR At December 31 1997 1996 Commercial paper $3,113 $1,950 Currently maturing long-term debt 874 463 Other 11 36 Total debt maturing within one year $3,998 $2,449 Weighted-average interest rate of short-term debt 5.8% 5.5% A consortium of lenders provides revolving credit facilities of $5.0 billion to AT&T. These credit facilities are intended for general corporate purposes, which include support for AT&T's commercial paper, and were unused at December 31, 1997. LONG-TERM OBLIGATIONS At December 31 1997 1996 Interest Rates (a) Maturities DEBENTURES 4 3/8% to 4 3/4% 1998-1999 $ 500 $ 500 5 1/8% to 6% 2000-2001 500 500 8 1/8% to 8 5/8% 2002-2031 1,996 1,996 NOTES 5 9/38% to 7 3/4% 1998-2025 4,000 4,341 8% to 8 17/20% 1998-2025 579 786 9 3/5% to 12 7/8% 1998-2004 30 60 Variable rate 1998-2054 67 115 Total debentures and notes 7,672 8,298 Other 83 112 Less: Unamortized discount-net 55 64 Total long-term obligations 7,700 8,346 Less: Currently maturing long-term debt 874 463 Net long-term obligations $6,826 $7,883 (a) Note that the actual interest paid on our debt obligations may have differed from the stated amount due to our entering into interest rate swap contracts to manage our exposure to interest rate risk and our strategy to reduce finance costs. This table shows the maturities at December 31, 1997, of the $7,700 in total long-term obligations: 1998 1999 2000 2001 2002 Later Years $874 $1,063 $658 $657 $504 $3,944 12. FINANCIAL INSTRUMENTS In the normal course of business we use various financial instruments, including derivative financial instruments, for purposes other than trading. We do not use derivative financial instruments for speculative purposes. These instruments include letters of credit, guarantees of debt, interest rate swap agreements and foreign currency exchange contracts. Interest rate swap agreements and foreign currency exchange contracts are used to mitigate interest rate and foreign currency exposures. Collateral is generally not required for these types of instruments. By their nature all such instruments involve risk, including the credit risk of nonperformance by counterparties, and our maximum potential loss may exceed the amount recognized in our balance sheet. However, at December 31, 1997, and 1996, in management's opinion there was no significant risk of loss in the event of nonperformance of the counterparties to these financial instruments. We control our exposure to credit risk through credit approvals, credit limits and monitoring procedures. We do not have any significant exposure to any individual customer or counterparty, nor do we have any major concentration of credit risk related to any financial instruments. LETTERS OF CREDIT Letters of credit are purchased guarantees that ensure our performance or payment to third parties in accordance with specified terms and conditions and do not create any additional risk to AT&T. GUARANTEES OF DEBT From time to time we guarantee the debt of our subsidiaries and certain unconsolidated joint ventures. Additionally, in connection with restructurings of AT&T in 1996, we issued guarantees for certain debt obligations of AT&T Capital and NCR. At December 31, 1997, and 1996, respectively, the amount of guaranteed debt associated with AT&T Capital and NCR was $120 and $230. INTEREST RATE SWAP AGREEMENTS We enter into interest rate swaps to manage our exposure to changes in interest rates and to lower our overall costs of financing. We enter into swap agreements to manage the fixed/floating mix of our debt portfolio in order to reduce aggregate risk to interest rate movements. Interest rate swaps also allow us to raise funds at floating rates and effectively swap them into fixed rates that are lower than those available to us if fixed-rate borrowings were made directly. These agreements involve the exchange of floating-rate for fixed-rate payments or fixed-rate for floating-rate payments without the exchange of the underlying principal amount. Fixed interest rate payments at December 31, 1997, are at rates ranging from 6.96% to 7.75%. Floating-rate payments are based on rates tied to LIBOR. The following table indicates the types of swaps in use at December 31, 1997, and 1996, and their weighted-average interest rates. Average variable rates are those in effect at the reporting date and may change significantly over the lives of the contracts. 1997 1996 Fixed to variable swaps-notional amount $422 $632 Average receive rate 7.54% 7.55% Average pay rate 5.67% 5.32% Variable to fixed swaps-notional amount $249 $351 Average receive rate 5.70% 5.77% Average pay rate 7.42% 5.71% The weighted-average remaining terms of the swap contracts are 3 years for 1997 and 5 years for 1996. FOREIGN EXCHANGE We enter into foreign currency exchange contracts, including forward and option contracts, to manage our exposure to changes in currency exchange rates, principally French francs, Deutsche marks, British pounds sterling and Japanese yen. The use of these derivative financial instruments allows us to reduce our exposure to the risk of adverse changes in exchange rates on the eventual reimbursement to foreign telephone companies for their portion of the revenues billed by AT&T for calls placed in the U.S. to a foreign country and other foreign currency payables and receivables. These transactions are generally expected to occur in less than one year. FAIR VALUES OF FINANCIAL INSTRUMENTS INCLUDING DERIVATIVE FINANCIAL INSTRUMENTS The following table summarizes the notional amounts of material financial instruments. The notional amounts represent agreed-upon amounts on which calculations of dollars to be exchanged are based. They do not represent amounts exchanged by the parties and, therefore, are not a measure of our exposure. Our exposure is limited to the fair value of the contracts with a positive fair value plus interest receivable, if any, at the reporting date. DERIVATIVES AND OFF BALANCE SHEET INSTRUMENTS 1997 1996 Contract/ Contract/ Notional Notional Amount Amount Interest rate swap agreements $671 $983 Foreign exchange: Forward contracts 426 646 Option contracts 2 65 Letters of credit 63 264 Guarantees of debt 242 328 The tables below show the valuation methods and the carrying amounts and estimated fair values of material financial instruments. FINANCIAL INSTRUMENT VALUATION METHOD Debt excluding capital leases Market quotes or based on rates available to us for debt with similar terms and maturities Letters of credit Fees paid to obtain the obligations Guarantees of debt There are no quoted market prices for similar agreements available Interest rate swap agreements Market quotes obtained from dealers Foreign exchange contracts Market quotes For debt excluding capital leases, the carrying amounts and fair values were $10,810 and $11,112, respectively, for 1997; and $10,319 and $10,609, respectively, for 1996. DERIVATIVES AND OFF BALANCE SHEET INSTRUMENTS 1997 Carrying Fair Amount Value Asset Liab. Asset Liab. Interest rate swap agreements $3 $10 $5 $31 Foreign exchange forward contracts - 21 3 33 1996 Carrying Fair Amount Value Asset Liab. Asset Liab. Interest rate swap agreements $5 $ 8 $47 $12 Foreign exchange forward contracts 6 15 7 35 13. COMMITMENTS AND CONTINGENCIES In the normal course of business we are subject to proceedings, lawsuits and other claims, including proceedings under laws and regulations related to environmental and other matters. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at December 31, 1997. These matters could affect the operating results of any one quarter when resolved in future periods. However, we believe that after final disposition any monetary liability or financial impact to us beyond that provided for at year-end would not be material to our annual consolidated financial statements. We lease land, buildings and equipment through contracts that expire in various years through 2032. Our rental expense under operating leases was $822 in 1997, $718 in 1996 and $653 in 1995. The following table shows our future minimum lease payments due under noncancelable operating leases at December 31, 1997. Such payments total $3,384. The total of minimum rentals to be received in the future under noncancelable subleases as of December 31, 1997, was $275. 1998 1999 2000 2001 2002 Later Years $652 $528 $444 $334 $249 $1,177 14. QUARTERLY INFORMATION (UNAUDITED) 1997 First Second Third Fourth Revenues $12,662 $12,825 $13,004 $12,828 Operating income 1,639 1,511 1,775 2,043 Income from continuing operations 1,088 928 1,133 1,323 Income from discontinued operations 38 31 20 11 Gain on sale of discontinued operation - - 66 - Net income 1,126 959 1,219 1,334 Income per common share-basic: Continuing operations .67 .57 .70 .81 Discontinued operations .02 .02 .01 .01 Gain on sale of discontinued operation - - .04 - Net income .69 .59 .75 .82 Income per common share-diluted: Continuing operations .67 .57 .69 .81 Discontinued operations .02 .02 .02 - Gain on sale of discontinued operation - - .04 - Net income .69 .59 .75 .81 Dividends declared .33 .33 .33 .33 Stock price*: High $41 7/8 $38 1/4 $45 15/16 $63 15/16 Low 34 3/8 30 3/4 34 1/4 43 3/16 Quarter-end close 34 7/8 35 1/16 44 1/4 61 5/16 * Stock prices obtained from the Composite Tape 1996 First Second Third Fourth Revenues $12,378 $12,459 $12,837 $12,872 Operating income 2,369 2,273 2,211 1,910 Income from continuing operations 1,439 1,509 1,380 1,245 Income(loss) from discontinued operations (77) (18) 52 216 Gain on sale of discontinued operation - - - 162 Net income 1,362 1,491 1,432 1,623 Income(loss) per common share-basic: Continuing operations .90 .94 .85 .77 Discontinued operations (.05) (.01) .04 .13 Gain on sale of discontinued operation - - - .10 Net income .85 .93 .89 1.00 Income(loss) per common share-diluted: Continuing operations .90 .93 .85 .77 Discontinued operations (.05) (.01) .04 .13 Gain on sale of discontinued operation - - - .10 Net income .85 .92 .89 1.00 Dividends declared .33 .33 .33 .33 Stock price*: High $68 7/8 $64 7/8 $62 3/8 $44 1/2 Low 60 1/8 58 49 1/4 33 1/4 Quarter-end close 61 1/8 62 52 1/4 43 3/8 * Stock prices obtained from the Composite Tape Stock prices on or before September 30, 1996, have not been restated to reflect the Lucent spin-off. Stock prices on or before December 31, 1996, have not been restated to reflect the NCR spin-off. 15. SUBSEQUENT EVENT On January 8, 1998, AT&T signed a definitive merger agreement with Teleport Communications Group Inc. (TCG) for an all-stock transaction valued at approximately $11.3 billion. Under the agreement each TCG share will be exchanged for .943 of an AT&T share. The merger is subject to regulatory approvals and certain other conditions as well as the receipt of opinions that the merger will be tax-free to TCG shareowners. The transaction is expected to close in the second half of 1998. EX-21 16 LIST OF SUBSIDIARIES OF AT&T CORP. AS OF 03/26/98 List of Subsidiaries of AT&T Corp. As of 3/26/98 Jurisdiction of Incorporation Alascom,Inc...........................................Alaska Actuarial Sciences Associates,Inc.....................Delaware AT&T Canada Long Distance Services Company............Canada AT&T Communications, Inc..............................Delaware AT&T Communications of California, Inc................California AT&T Communications of Delaware, Inc..................Delaware AT&T Communications of Hawaii, Inc....................Hawaii AT&T Communications of Illinois, Inc..................Illinois AT&T Communications of Indiana, Inc...................Indiana AT&T Communications of Maryland, Inc..................Maryland AT&T Communications of Michigan, Inc..................Michigan AT&T Communications of the Midwest, Inc...............Iowa AT&T Communications of the Mountain States, Inc.......Colorado AT&T Communications of Nevada, Inc....................Nevada AT&T Communications of New England, Inc...............New York AT&T Communications of New Hampshire, Inc.............New Hampshire AT&T Communications of New Jersey, Inc................New Jersey AT&T Communications of New York, Inc..................New York AT&T Communications of Ohio, Inc......................Ohio AT&T Communications of the Pacific Northwest, Inc.....Washington AT&T Communications of Pennsylvania, Inc..............Pennsylvania AT&T Communications of the South Central States,Inc...Delaware AT&T Communications of the Southern States, Inc.......New York AT&T Communications of the Southwest, Inc.............Delaware AT&T Communications of Virginia, Inc..................Virginia AT&T Communications of Washington D.C., Inc...........New York AT&T Communications of West Virginia, Inc.............West Virginia AT&T Communications of Wisconsin, Inc.................Wisconsin AT&T Communications Services International Inc........Delaware AT&T Communications (UK) LTD..........................United Kingdom AT&T Global Communications Services Inc...............Delaware AT&T Istel............................................United Kingdom AT&T Solutions Inc....................................Delaware AT&T of Puerto Rico, Inc..............................New York AT&T Universal Card Services Corporation..............Delaware AT&T Wireless Services, Inc...........................Delaware LIN Broadcasting Corporation..........................Delaware EX-23 17 CONSENT OF COOPERS & LYBRAND L.L.P. CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of AT&T Corp. ("AT&T" or the "Company") on Form S-3 for the Shareowner Dividend Reinvestment and Stock Purchase Plan (Registration No. 333-00573), Form S-8 for the AT&T Long Term Savings and Security Plan (Registration Nos. 33-34265 and 33-47257), Form S-8 for the AT&T Long Term Savings Plan for Management Employees (Registration Nos. 33-34264, 33-29256 and 33-21937), Form S-8 for the AT&T Retirement Savings and Profit Sharing Plan (Registration No. 33-39708), Form S-8 for Shares Issuable Under the Stock Option Plan of the AT&T 1987 Long Term Incentive Program (Registration Nos. 33-56643, 33-49465, 33-20276 and 33-47251), Form S-8 for the AT&T of Puerto Rico, Inc. Long Term Savings Plan for Management Employees (Registration No. 33-50819), Form S-8 for the AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan (Registration No. 33-50817), and Post-Effective Amendment No. 1 on Form S-8 to Form S-8 Registration Statement (Registration No. 33-54797) for the AT&T 1996 Employee Stock Purchase Plan, Form S-8 for the AT&T Shares for Growth Program (Registration Nos. 33-49089 and 33-47255), Form S-8 for the AT&T 1997 Long Term Incentive Program (Registration No. 33-28665), Form S-3 for the AT&T $2,600,000,000 Notes and Warrants to Purchase Notes (Registration No. 33-49589), Form S-3 for the AT&T $3,000,000,000 Notes and Warrants to Purchase Notes (Registration No. 33-59495), Form S-4 for the AT&T 5,000,000 Common Shares (Registration No. 33-57745), and in Post-Effective Amendment Nos. 1, 2 and 3 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-42150) for the NCR Corporation 1989 Stock Compensation Plan (Registration No. 33-42150-01), the NCR Corporation 1984 Stock Option Plan (Registration No. 33-42150-02) and the NCR Corporation 1976 Stock Option Plan (Registration No. 33-42150-03), respectively, and the Post-Effective Amendment Nos. 1, 2, 3 and 5 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-52119) for the McCaw Cellular Communications, Inc. 1983 Non-Qualified Stock Option Plan (Registration No. 33-52119-01), the McCaw Cellular Communications, Inc. 1987 Stock Option Plan (Registration No. 33-52119-02), the McCaw Cellular Communications, Inc. Equity Purchase Plan (Registration No. 33-52119-03) and the McCaw Cellular Communications, Inc. Employee Stock Purchase Plan (Registration No. 33-52119-05), respectively, and Post-Effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-45302) for the Teradata Corporation 1987 Incentive and Other Stock Option Plan (Registration No. 33-45302-01), Form S-8 for the AT&T Amended and Restated 1969 Stock Option Plan for LIN Broadcasting Corp. (Registration No. 33-63195) of our reports dated January 26, 1998, on our audits of the consolidated financial statements and consolidated financial statement schedule of the Company and its subsidiaries at December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996 and 1995. COOPERS & LYBRAND L.L.P. 1301 Avenue of the Americas New York, New York March 25, 1998 EX-24 18 POWERS OF ATTORNEY POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is both a director and an officer of the Company, as indicated below his signature: NOW, THEREFORE, the undersigned hereby constitutes and appoints D. E. SOMERS, M. B. TART and M. J. WASSER and each of them, as attorney for him and in his name, place and stead, and in his capacity as both a director and an officer of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 12th day of March 1998. /s/ C. Michael Armstrong ----------------------------------- By: C. Michael Armstrong Chairman of the Board and Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is both a director and an officer of the Company, as indicated below his signature: NOW, THEREFORE, the undersigned hereby constitutes and appoints D. E. SOMERS, M. B. TART and M. J. WASSER and each of them, as attorneys for him and in his name, place and stead, and in his capacity as an officer of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 16th day of March, 1998. /s/ J. D. Zeglis ----------------------------------- By: J. D. Zeglis President and Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is an officer of the Company, as indicated below his signature: NOW, THEREFORE, the undersigned hereby constitutes and appoints M. B. TART and M. J. WASSER and each of them, as attorneys for him and in his name, place and stead, and in his capacity as an officer of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 12th day of March, 1998. /s/ D. E. Somers ----------------------------------- By: D. E. Somers Senior Executive Vice President and Chief Financial Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is an officer of the Company, as indicated below her signature: NOW, THEREFORE, the undersigned hereby constitutes and appoints D. E. SOMERS and M. J. WASSER, and each of them, as attorneys for her and in her name, place and stead, and in her capacity as an officer of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 13th day of March, 1998. /s/ M. B. Tart ----------------------------------- By: M. B. Tart Vice President and Controller POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints D. E. SOMERS, M. B. TART and M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 17th day of March, 1998. /s/ Kenneth T. Derr ----------------------------------- By: Kenneth T. Derr Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints D. E. SOMERS, M. B. TART and M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 18th day of March, 1998. /s/ M. Kathryn Eickhoff ----------------------------------- By: M. Kathryn Eickhoff Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints D. E. SOMERS, M. B. TART and M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 13th day of March, 1998. /s/ Walter Y. Elisha ----------------------------------- By: Walter Y. Elisha Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints D. E. SOMERS, M. B. TART and M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 14th day of March, 1998. /s/ George M. C. Fisher ----------------------------------- By: George M. C. Fisher Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints D. E. SOMERS, M. B. TART and M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 26th day of March, 1998. /s/ Donald V. Fites ----------------------------------- By: Donald V. Fites Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints D. E. SOMERS, M. B. TART and M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 16th day of March, 1998. /s/ Ralph S. Larsen ----------------------------------- By: Ralph S. Larsen Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints D. E. SOMERS, M. B. TART and M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 18th day of March, 1998. /s/ Donald F. McHenry ----------------------------------- By: Donald F. McHenry Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints D. E. SOMERS, M. B. TART and M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 18th day of March, 1998. /s/ Michael I. Sovern ----------------------------------- By: Michael I. Sovern Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints D. E. SOMERS, M. B. TART and M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 16th day of March, 1998. /s/ Thomas H. Wyman ----------------------------------- By: Thomas H. Wyman Director EX-27 19 FDS --
5 This schedule contains summary financial information extracted from the unaudited balance sheet of AT&T Corp. at December 31, 1995 and the unaudited consolidated statement of income for the twelve-month period ended December 31, 1995 and is qualified in its entirety by reference to such financial statements. 1,000,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 75 0 9,137 797 0 20,510 33,574 17,553 62,228 24,413 8,545 0 0 1,596 15,678 62,228 0 48,445 0 43,261 0 1,613 490 4,978 1,943 3,035 (2,896) 0 0 139 0.09 0.09
EX-27 20 FDS --
5 This schedule contains summary financial information extracted from the unaudited balance sheet of AT&T Corp. at March 31, 1996 and the unaudited consolidated statement of income for the three-month period ended March 31, 1996 and is qualified in its entirety by reference to such financial statements. 1,000,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 158 0 10,006 798 0 19,934 33,765 17,805 60,057 21,381 8,486 0 0 1,606 17,051 60,057 0 12,378 0 10,009 0 369 125 2,328 909 1,439 (77) 0 0 1,362 0.85 0.85
EX-27 21 FDS --
5 This schedule contains summary financial information extracted from the unaudited balance sheet of AT&T Corp. at June 30, 1996 and the unaudited consolidated statement of income for the six-month period ended June 30, 1996 and is qualified in its entirety by reference to such financial statements. 1,000,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 0 0 9,442 820 0 17,796 34,814 18,207 57,869 16,133 8,033 0 0 1,610 20,822 57,869 0 24,837 0 20,195 0 790 225 4,625 1,677 2,948 (95) 0 0 2,853 1.78 1.77
EX-27 22 FDS --
5 This schedule contains summary financial information extracted from the unaudited balance sheet of AT&T Corp. at September 30, 1996 and the unaudited consolidated statement of income for the nine-month period ended September 30, 1996 and is qualified in its entirety by reference to such financial statements. 1,000,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 362 0 10,092 823 0 17,709 36,129 18,462 56,303 16,068 7,851 0 0 1,619 19,434 56,303 0 37,674 0 30,821 0 1,254 300 6,843 2,515 4,328 (43) 0 0 4,285 2.67 2.66
EX-27 23 FDS --
5 This schedule contains summary financial information extracted from the unaudited balance sheet of AT&T Corp. at December 31, 1996 and the unaudited consolidated statement of income for the twelve-month period ended December 31, 1996 and is qualified in its entirety by reference to such financial statements. 1,000,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 0 0 9,911 942 0 17,073 39,385 19,649 55,382 16,151 7,883 0 0 1,623 18,672 55,382 0 50,546 0 41,783 0 1,938 343 8,810 3,237 5,573 335 0 0 5,908 3.67 3.66
EX-27 24 FDS --
5 This schedule contains summary financial information extracted from the audited balance sheet of AT&T at March 31, 1997, and the audited consolidated statement of income for the three-month period ended March 31, 1997, and is qualified in its entirety by reference to such financial statements. 1,000,000 3-mos Dec-31-1997 Jan-1-1997 Mar-31-1997 198 0 9,687 999 0 15,724 39,457 20,151 54,461 14,464 7,867 0 0 1,624 19,242 54,461 0 12,662 0 11,023 0 549 52 1,755 667 1,088 38 0 0 1,126 .69 .69
EX-27 25 FDS --
5 This schedule contains summary financial information extracted from the audited balance sheet of AT&T at June 30, 1997, and the audited consolidated statement of income for the six-month period ended June 30, 1997, and is qualified in its entirety by reference to such financial statements. 1,000,000 6-mos Dec-31-1997 Jan-1-1997 Jun-30-1997 22 0 9,593 987 0 15,056 40,683 20,755 54,946 15,047 7,216 0 0 1,625 19,683 54,946 0 25,487 0 22,337 0 1,032 108 3,266 1,250 2,016 69 0 0 2,085 1.28 1.28
EX-27 26 FDS --
5 This schedule contains summary financial information extracted from the audited balance sheet of AT&T at September 30, 1997, and the audited consolidated statement of income for the nine-month period ended September 30, 1997, and is qualified in its entirety by reference to such financial statements. 1,000,000 9-mos Dec-31-1997 Jan-1-1997 Sep-30-1997 186 0 9,927 1,046 0 15,632 42,387 21,423 56,449 15,957 7,054 0 0 1,625 20,360 56,449 0 38,491 0 33,566 0 1,501 152 5,124 1,975 3,149 155 0 0 3,304 2.03 2.03
EX-27 27 FDS --
5 This schedule contains summary financial information extracted from the audited balance sheet of AT&T at December 31, 1997, and the audited consolidated statement of income for the twelve-month period ended December 31, 1997, and is qualified in its entirety by reference to such financial statements. 1,000,000 12-mos Dec-31-1997 Jan-1-1997 Dec-31-1997 145 0 9,550 977 0 16,179 44,563 21,853 58,635 16,942 6,826 0 0 1,624 21,023 58,635 0 51,319 0 44,351 0 1,957 191 7,193 2,721 4,472 166 0 0 4,638 2.85 2.84
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