-----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, D0tG1bzCbJEaCdfRvBHRT9Q+4wgKCktlIUQwuQawUQgm5dyjiRTC+nr2zB4CY1V/ 7gU0zmO84I/+haI/7e9fhw== 0000005907-99-000001.txt : 19990111 0000005907-99-000001.hdr.sgml : 19990111 ACCESSION NUMBER: 0000005907-99-000001 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19981016 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990108 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: 8-K/A SEC ACT: SEC FILE NUMBER: 001-01105 FILM NUMBER: 99502555 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 8-K/A 1 AMENDED FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: October 16, 1998 AT&T CORP. A New York Commission File I.R.S. Employer Corporation No. 1-1105 No.13-4924710 32 Avenue of the Americas, New York, New York 10013-3412 Telephone Number (212) 387-5400 Form 8-K/A AT&T Corp. October 16, 1998 Item 5. Other Events. AT&T is making available its audited consolidated financial results and certain other information for the year ended December 31, 1997. Certain reclassifications were made to the Consolidated Statements of Cash Flows. In addition, certain disclosures were added to the Notes to the Consolidated Financial Statements and Management's Discussion and Analysis of Results of Operations and Financial Condition which was filed with the Securities Exchange Commission on October 16, 1998, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. 1. Report of Independent Accountants. 2. Management's Discussion and Analysis. 3. Five-Year Summary of Selected Financial Data. 4. Consolidated Statements of Income for the Years Ended December 31, 1997, 1996, and 1995. 5. Consolidated Balance Sheets at December 31, 1997, and 1996. 6. Consolidated Statements of Changes in Shareowners' Equity for the Years Ended December 31, 1997, 1996, and 1995. 7. Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996, and 1995. 8. Notes to Consolidated Financial Statements. AT&T is also making available its restated unaudited consolidated financial results and certain other information for the period ended June 30, 1998. Certain reclassifications were made to the Consolidated Statements of Cash Flows. In addition, certain disclosures were added to the Notes to the Consolidated Financial Statements and Management's Discussion and Analysis of Results of Operations and Financial Condition which was filed with the Securities Exchange Commission on October 16, 1998, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Filed as Exhibit 99.1 to this 8-K/A is the following information: 1. Management's Discussion and Analysis for the Six Months Ended June 30, 1998. 2. Unaudited Consolidated Statements of Income for the Six Months Ended June 30, 1998 and 1997. 3. Unaudited Consolidated Balance Sheets at June 30, 1998 and December 31, 1997. 4. Unaudited Consolidated Statements of Changes in Shareowners' Equity for the Six Months Ended June 30, 1998 and June 30, 1997. 5. Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and June 30, 1997. 6. Notes to Consolidated Financial Statements. Form 8-K/A AT&T Corp. October 16, 1998 Item 7. Financial Statements and Exhibits. (c) Exhibits. Exhibit 12 Computation of Ratio of Earnings to Fixed Charges Exhibit 23 Consent of Independent Accountants Exhibit 27 Financial Data Schedules. Exhibit 99.1 AT&T Corp. unaudited consolidated financial results and certain other information for the six months ended June 30, 1998. Exhibit 99.2 Quarterly Consolidated Statements of Income for 1998 and 1997. Exhibit 99.3 Unaudited Condensed Statements of Income for the month ended August 31, 1998 and unaudited Condensed Balance Sheet at August 31, 1998. Report of Independent Accountants on financial statement schedule Schedule II - Valuation and Qualifying Accounts Form 8-K/A AT&T Corp. October 16, 1998 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareowners of AT&T Corp.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and changes in shareowners' equity and of cash flows present fairly, in all material respects, the financial position of AT&T Corp. and its subsidiaries (AT&T) at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of AT&T's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits on these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP 1301 Avenue of the Americas New York, New York January 26, 1998 (September 23, 1998 as to Note 15) Form 8-K/A AT&T Corp. October 16, 1998 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AT&T CORP. /s/ M. B. Tart ---------------------------------- By: M. B. Tart Vice President and Controller January 6, 1999 Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS - FOR THE YEAR ENDED DECEMBER 31, 1997 January 1, 1997, marked a beginning for AT&T. The challenge of completing the "trivestiture" was behind us and we entered the new year as a new company -- one better focused and prepared to face the increasingly competitive and dynamic telecommunications industry. As our experience in 1997 proved, however, the most challenging period in this company's history did not end with trivestiture. Rather, we had just begun the work needed to position ourselves strategically and financially in order to grow profitably in the years to come. Change and complexity characterized the industry in 1997. New services continued to emerge -- services like voice over the Internet and Internet Protocol(IP) networks. Digital technology continued to revolutionize the wireless communications business. Demand for data transmission services such as frame relay multiplied, and corporations demanded help managing their ever more complex, more global telecommunications needs. The maze of regulatory issues impacting our business grew more and more intricate. Even the very structure of the industry changed as companies from all parts of the industry looked for partners to help them become providers of complete offerings of telecommunications services. As if all this wasn't challenging enough in 1997, competition intensified in our long-distance and wireless businesses where we faced some of the stiffest competitive conditions around. Aggressive industry pricing practices put pressure on our margins in long-distance services for businesses. The competition used price and innumerable other tactics to attack our residential base and new competitors entered wireless markets all over the country with aggressive offers. Our mission for 1997 was to take the critical actions needed to prepare AT&T for the future. Our ultimate ability to deliver shareowner value depends on the strategic position and the financial strength and flexibility that we create for ourselves today. But we also understand the need to balance concern for the future with our investors' expectations for solid financial performance in the present. Form 8-K/A AT&T Corp. October 16, 1998 So in 1997, we did invest for the future. We invested in our local service initiative which reduced earnings before interest and taxes (EBIT), including other income, by almost $1 billion and reduced earnings per share by about $0.32. We did not get the return we wanted on this investment, so we made the important economic decision to discontinue our efforts to sell local service to residential customers on a total services resale basis. We remain committed to providing local service to our residential customers, but only when an economically viable means of doing so can be developed. On the business side, we accelerated our local entry in January 1998 when we executed a merger agreement with Teleport Communications Group, Inc. (TCG), the largest competitive local exchange carrier. On July 23, 1998, AT&T completed the merger. Each share of TCG common stock was exchanged for 0.943 of AT&T common stock resulting in an issuance of 181.6 million shares in the transaction. The merger was accounted for as a pooling of interests, and accordingly, AT&T's historical financial statements have been restated to reflect the combined results of AT&T and TCG. TCG brings to AT&T local facilities in 83 of the top U.S. markets, along with the management expertise we need to win in the business local market. The TCG deal, valued at about $11 billion, is expected to generate over $1 billion in synergies in 1999, growing to $2.2 - $2.5 billion in 2002. We also continued to develop businesses that are important to our long-term success. These businesses include international markets (excluding bilateral traffic), AT&T Solutions -- our outsourcing, consulting and networking integration professional services business; AT&T WorldNet -- our Internet access service for homes and businesses, and wireless service in new 1.9 GHz markets. We invested heavily in these businesses in 1997; they further reduced AT&T's EBIT by more than $1.6 billion, and earnings per share* by about $0.55 for the year. *All earnings per share information in this discussion is presented on a diluted basis, meaning that the share balance used in the calculation includes shares outstanding plus shares that may be issued as a result of the exercise of options. Form 8-K/A AT&T Corp. October 16, 1998 We continued to invest in our core long-distance business as well. The AT&T long-distance network handled a record volume of traffic in 1997, including a new one-day record of 319 million calls on the Monday after Thanksgiving. Approximately 99.96% of these calls were completed on the first try. In order to maintain this level of capacity and reliability, as well as respond to new demands, we invested the majority of our capital spending in 1997 in the long-distance network, deploying Synchronous Optical Network (SONET) technology rings across the country and increasing the capacity of our data networks. All this investment, plus the effects of competition on our core long-distance and wireless businesses, put a strain on our financial performance. As a result, our 1997 earnings were down from the prior year, as explained below in the discussion of our financial results for the year. But again, we recognize the need to balance investment with current earnings and to have maximum financial flexibility in this growing industry. Therefore, we moved aggressively to shore up our financial position and stabilize our earnings. We continued to divest Form 8-K/A AT&T Corp. October 16, 1998 assets and businesses not critical to our long-term strategy. We completed the sales of AT&T Tridom, AT&T Skynet, our submarine systems business and our investment in DirecTV. Additionally, in 1997 we reached agreements to sell UCS, AT&T Solutions Customer Care, and our holdings of LIN Television Corporation and WOOD-TV. We also reduced our strategic investment in SmarTone Communications. As of September, 1998 all of these businesses have been sold with the exception of Wood-TV, which is expected to close in the fourth quarter of 1998. All told, these transactions have generated over $12 billion in cash for AT&T (pretax). As a result, our already solid balance sheet has become even stronger. In order to deliver on the earnings expectations of our investors and to position ourselves for the future, we attacked our cost structure aggressively in 1997 and intend to do a lot more in 1998 and beyond. As a result of our cost reduction efforts, our selling, general and administrative (SG&A) expenses declined in the fourth quarter of 1997. Our earnings, after hitting the low-water mark in the second quarter, showed sequential improvement in the third and fourth quarters. Further, we expect to reduce SG&A by $1.6 billion in 1998 (excluding TCG) and our goal is to achieve a level of SG&A expenses equal to 22% of revenues by the end of 1999. On January 26, 1998, we announced a plan to reduce headcount by 15,000 to 18,000 over two years as part of the Company's overall cost reduction program. In connection with this plan, a voluntary retirement incentive program (VRIP) was offered to eligible management employees. Approximately 15,300 management employees accepted the VRIP offer. During the second quarter of 1998 AT&T recorded restructuring charges of $2,743 million ($1,694 million after-tax) primarily in connection with the VRIP offer. The restructuring charges of $2,743 million will be partially offset by approximately $1.1 billion of gains to be recognized in the third and fourth quarters of 1998 as employees' pension benefit obligations are settled. The amount of gains to be recognized in future periods is subject to market fluctuations. Due to the capital market downturn and the lowering of the discount rate, as of the beginning of October, we estimate that the gains will be $0.7 billion. Shareowners recognized our efforts in 1997. AT&T was the top performing stock in the Dow Jones Industrial Average (DJIA) for the six months ending December 31, 1997, and had the seventh-highest appreciation among the Dow stocks for the full year. Our stock generated a total return, including dividends, of over 53% in 1997. We hope to continue to produce a high return in 1998 and beyond by delivering earnings growth. Form 8-K/A AT&T Corp. October 16, 1998 OPERATING RESULTS Our income from continuing operations decreased $1,209 million, or 22.2%, in 1997. Lower earnings from the core business and increased dilution from investments in initiatives contributed almost equally to the decline in earnings in 1997. Core earnings were lower due primarily to higher depreciation and amortization expenses driven by higher levels of capital investment. In 1997 we invested $7.7 billion in capital, the majority of which was directed toward increasing the capacity and technology of our long-distance and wireless networks, including the installation of SONET facilities. We expect to complete our SONET program in 1998 with a total of 52 rings providing coast-to-coast connectivity. Our local service efforts and our expansion into new wireless markets were the primary drivers of the increase in dilution from initiatives in 1997. In 1996 our income from continuing operations increased $2,477 million, or 83.1%. Excluding the 1995 restructuring charge discussed below, income from continuing operations increased $445 million, or 8.9%. Dollars in Millions For the Years Ended December 31 1997 1996 1995* Income from Continuing Operations $4,249 $5,458 $ 2,981 Income from Discontinued Operations 100 173 (2,896) Gain on Sale of Discontinued Operations 66 162 - Net Income $4,415 $5,793 $ 85 Earnings Per Share - Diluted: Income from Continuing Operations $ 2.38 $ 3.09 $ 1.71 Income from Discontinued Operations 0.05 0.10 (1.66) Gain on Sale of Discontinued Operations 0.04 0.09 - Net Income $ 2.47 $ 3.28 $ 0.05 Earnings Per Share - Diluted: Core $ 3.25 $ 3.64 $ 1.89 Initiatives (0.87) (0.55) (0.18) Total Continuing Operations $ 2.38 $ 3.09 $ 1.71 *Includes restructuring and other charges In 1995 our core business recorded pretax charges of $3,023 million of restructuring and other charges. The charges covered consolidating and reorganizing numerous corporate and business units over several years. The total impact on income from continuing operations was $2,032 million, or $1.17 per share. The impact on income from discontinued operations was $3,321 million, or $1.91 per share. The impact on net income was $5,353 million, or $3.08 per share. Form 8-K/A AT&T Corp. October 16, 1998 Income related to discontinued operations, including gains on disposals, was $166 million in 1997 and $335 million in 1996. As of December 31, 1997, UCS was the only business remaining in discontinued operations. On April 2, 1998, AT&T sold AT&T Universal Card Services, Inc. (UCS) for $3,500 million to Citibank. In addition, we received $5,722 million as settlement of receivables from UCS. We completed the sale of our submarine systems business in the third quarter of 1997, and in 1996 we successfully divested Lucent, NCR, AT&T Capital and other businesses. REVENUES We reported our 1997 revenues in five categories: business and consumer services, wireless services, other and corporate, and eliminations. Total revenues grew $889 million, or 1.8%, in 1997 and $2,239 million, or 4.6%, in 1996. Dollars in Millions For the Years Ended December 31 1997 1996 1995 Business services $22,030 $21,491 $20,421 Consumer services 23,527 24,184 23,917 Wireless services 4,668 4,246 3,639 Other and corporate 2,704 1,892 1,530 Eliminations (1,352) (1,125) (1,058) Total revenues $51,577 $50,688 $48,449 Business services revenue increased $539 million, or 2.5%, in 1997 and $1,070 million, or 5.2%, in 1996. Business long-distance services revenue, made up primarily of revenue from voice and data services, and related products sales, is the main contributor to the growth reflecting an increase of $516 million, or 2.4%, in 1997 and the entire increase in 1996. Adjusted for the sales of AT&T Skynet and AT&T Tridom, business long-distance revenue grew 3.1% in 1997. Strong growth in revenue from data services -- frame relay and other emerging services as well as private line -- drove the increase in business revenue. Revenue growth from voice services was hampered by pricing pressure brought on by a number of factors. Many voice service contracts were renegotiated during the year, encouraged by uncertainty surrounding the possibility of detariffing. Competitive pressure caused many of these contracts to be renegotiated at lower rates. Also, reductions in access costs were passed to customers in the form of Form 8-K/A AT&T Corp. October 16, 1998 lower rates, further pressuring revenue growth. Revenue growth in 1996 was fueled by both strong growth in business inbound (toll-free 800 and 888 services) and data services. Calling volume, or billed minutes, in business long-distance services grew in the mid-teens in both 1997 and 1996, both led by strong volume growth in inbound services as well as growth in outbound services and government markets. Again, lower price levels on voice contracts substantially offset the growth in calling volume though the pricing environment began to show signs of stabilization in the fourth quarter of 1997. Consumer services revenue declined $657 million, or 2.7%, in 1997 and increased $267 million, or 1.1%, in 1996. Consumer long-distance services, the primary revenue driver, declined $697 million, or 2.9%, in 1997 and increased $266 million, or 1.1%, in 1996. However, our 1997 revenue growth was impacted by a number of strategic choices intended to improve profitability. For instance, we accelerated the use of free minutes as a customer incentive in 1997, increasingly using them in place of checks. Since free minutes are presented as contra-revenue on the income statement while checks are classified as a promotional expense, our move toward free minutes served to reduce revenue growth. This shift, plus the effects of flowing savings from access reform through to customers resulting in lower prices, accounted for 2 percentage points of the 2.7% decline in revenue. The remaining decline was primarily due to another move designed to improve long-term profitability -- the migration of customers to more favorable calling plans. This is a key element in our strategy to retain our most profitable customers. Partially offsetting the declines was growth in intraLATA, or local-toll services. Presubscription processes allowing customers to choose AT&T as their preferred local-toll carrier helped revenue from these services grow substantially in 1997. In 1996 the increase in consumer revenue was driven by price increases instituted throughout the year. Form 8-K/A AT&T Corp. October 16, 1998 Another element in our strategy to attract and retain the most profitable residential customers and to improve our bottom line was to refine our marketing efforts in the second half of the year so that the customer base we targeted for acquisition would not include customers who are not profitable to us. While not having a material impact on consumer revenue or volume for the full year 1997, this strategic shift may cause further pressure on these measures in the future. Consumer calling volume increased by a low-single-digit percentage in 1997 compared with a decrease of a similar magnitude in 1996. The increase was due to strong growth in intraLATA volume, again as a result of capturing the opportunity offered by local-toll presubscription, while in 1996 declines in domestic volumes were partially offset by growth in international volumes. Total long-distance services revenues -- the sum of the business and consumer categories -- was $45,490 million in 1997, essentially flat compared with $45,671 million in 1996. Volume increased 8.7% for the year. In 1996 long-distance revenues increased $1,336 million, or 3.0%, on a volume increase of 5.9%. The gap between volume and revenue growth widened to 9.1% in 1997 due to the revenue factors mentioned above, including the flow-through of access charge reductions, and also due to the growth in lower-priced services such as intraLATA. The 1996 gap reflected the impact of promotional discounts, increased movement of customers to optimal calling plans and increased discounts given to large accounts. In addition, international volumes increased in 1996 while international revenue remained relatively flat. Wireless services revenue, which includes wireless voice and data, messaging, air-to-ground services, product sales, and costs associated with fixed wireless development increased $422 million, or 9.9%, in 1997. Revenue from AT&T's new 1.9 GHz markets is included in this figure, although its impact on the annual growth rate was minimal. Adjusted for the impact of wireless properties disposed of in December 1996, the 1997 revenue growth rate would have been 12.5%. The revenue growth was driven by consolidated subscriber growth of 18.5% in 1997. Form 8-K/A AT&T Corp. October 16, 1998 In 1996 wireless revenue increased $607 million, or 16.7%, on a 30.4% increase in subscribers. The slower rates of growth in 1997 reflect the increased competition that characterized the wireless industry in 1997. Competition was particularly fierce in the southwestern and western areas of the U.S. where the introductory offers of new market entrants were often met with equally competitive offers from incumbent cellular competitors. The lower growth rates also reflect the fact that while new competitors have had a significant impact in many of our cellular (850 MHz) markets, we are just beginning to penetrate new markets with AT&T Digital PCS service on the 1.9 GHz spectrum. Finally, similar to our consumer strategy, toward the end of 1997 we began focusing our efforts on targeting high-value wireless customers and reducing sales to lower-end subscribers. While this strategic move impacted both revenue and subscriber growth rates in 1997, and will continue to impact these growth rates in 1998, it is designed to improve the profitability of the wireless business. This strategic shift, if successful, will help support our average revenue per user (ARPU) over time. In 1997 the impact of industry-wide competitive pricing pressure, along with increased "convenience" usage of wireless phones, overcame any benefit from our high-value strategy. ARPU in our existing cellular markets fell to $60 per month from approximately $67 in 1996 and $76 in 1995. Wireless customers, or subscribers, in markets where AT&T owns a majority interest (consolidated markets), stood at 6.0 million at December 31, 1997. This included over sixty thousand subscribers in our new 1.9 GHz markets. Cellular subscribers at December 31, 1996, and 1995 were 5.0 million and 3.9 million, respectively. Cellular subscribers in markets in which we have or share a controlling interest were 8.1 million at December 31, 1997, up 16.8% from 7.0 million at December 31, 1996. Cellular customers on this basis were 5.5 million at December 31, 1995. Revenue for other and corporate increased $812 million, or 43.0%, in 1997 and $362 million, or 23.7%, in 1996. The 1997 increase resulted primarily from increases in AT&T Solutions related primarily to outsourcing revenue, as well as revenue from TCG, AT&T WorldNet and international markets. AT&T Solutions, comprised primarily of outsourcing revenue, and local revenue from TCG drove the increase in 1996. Form 8-K/A AT&T Corp. October 16, 1998 Eliminations reflect the elimination of revenues for services sold between categories (e.g., sales of business long-distance services to other AT&T units). OPERATING EXPENSES For the year, operating expenses totaled $44,741 million, an increase of 6.6% from $41,979 million in 1996. In 1996 expenses decreased 3.0% from $43,280 million in 1995. Excluding the 1995 restructuring and other charges, operating expenses increased 4.3%. Dollars in Millions For the Years Ended December 31 1997 1996 1995 Access and other interconnection $16,350 $16,363 $17,647 Access and other interconnection expenses are the charges that we pay to connect calls on the facilities of local exchange carriers and other domestic service providers, and fees that we pay foreign telephone companies (settlements) to connect calls made to and from foreign countries on our behalf. These charges are designed to reimburse these carriers for the common and dedicated facilities and switching equipment used to connect our network with theirs. These costs remained essentially flat in 1997 as lower per-minute access costs were offset by solid volume growth and a beneficial second quarter 1996 accounting adjustment of previously estimated accruals to reflect actual billing. The lower per-minute access costs are primarily the result of declines in international settlement rates and access charge reform mandated by the Federal Communications Commission (FCC) effective for the second half of 1997. Interstate and intrastate tariff reductions, changes in traffic mix and network planning also contributed to the lower per-minute access costs. Form 8-K/A AT&T Corp. October 16, 1998 In 1996 access costs declined $1,284 million, or 7.3%, again due to lower per-minute access costs. This resulted from changes in the price-setting methodology approved by the FCC effective in the second half of 1995, and also from improvements in our infrastructure and reduced international settlements payments. The beneficial accounting adjustment mentioned above also contributed to the reduction. Access and other interconnection expenses were 31.7% of revenues in 1997, 32.3% in 1996 and 36.4% in 1995. We expect this percentage to continue to decline over time as we realize synergies from our merger with TCG. Dollars in Millions For the Years Ended December 31 1997 1996 1995 Network and other communications services $9,412 $8,063 $6,913 Network and other communications services expenses include the costs of operating and maintaining our network, operator services, non-income taxes, the provision for uncollectible receivables and compensation to payphone operators. More than half of the $1,349 million, or 16.7%, increase in 1997 was due to higher costs for initiatives, particularly AT&T Solutions, AT&T WorldNet, local service and wireless initiatives. The remaining increase was primarily driven by FCC-mandated compensation to payphone operators and higher expenses for operating and maintaining our network. Expenses for operating and maintaining our network increased due to higher costs for purchases from Lucent at retail and otherwise remained essentially unchanged despite increased calling volumes and the increased complexity of our service offerings. Growth in payphone compensation expense decelerated in the fourth quarter when the FCC agreed to a reduction in the per-call rate from $0.350 to $0.284. As a result of this action in the fourth quarter of 1997, AT&T was able to reverse some of the expense previously accrued in 1997. Form 8-K/A AT&T Corp. October 16, 1998 Network and other communications services expenses increased $1,150 million, or 16.6%, in 1996. The increase was due to increased costs from our expansion into new initiatives, enhancements made in customer care facilities and a higher provision for uncollectibles. Dollars in Millions For the Years Ended December 31 1997 1996 1995 Depreciation and amortization $3,982 $2,819 $2,623 Depreciation and amortization expenses increased $1,163 million, or 41.3%, in 1997. The increase was driven by higher levels of capital expenditures which totaled $3.1 billion in the fourth quarter of 1996 and $7.7 billion in 1997. In addition to higher volumes of purchases, the impact of purchasing assets at retail from Lucent also contributed to the higher level of capital spending. The 1997 expenditures were primarily for our long-distance and wireless networks, including the deployment of SONET. We also invested substantial capital in building our capability for local and WorldNet services. These capital investments were required to provide for growth in calling volumes, to increase capability, to introduce new technology, to enhance reliability, to expand our wireless footprint and to establish a local presence. We expect depreciation and amortization expenses to increase further in 1998 as we continue to expand and enhance our network. Depreciation and amortization increased $196 million, or 7.5%, in 1996. The increase was primarily the result of investment in the network partially offset by the impact of asset write-downs at the end of 1995. Dollars in Millions For the Years Ended December 31 1997 1996 1995 Selling, general and administrative $14,997 $14,734 $13,074 SG&A expenses increased $263 million, or 1.8%, in 1997. SG&A expenses were 29.1% of revenues in both 1997 and 1996 and 27.0% of revenues in 1995. While Form 8-K/A AT&T Corp. October 16, 1998 investment in initiatives and spending on transitory projects, such as preparation of our systems for the year 2000 ($113 million), put upward pressure on SG&A expenses in 1997, core SG&A spending declined for the year as a result of our efforts to achieve a competitive cost structure. The decline in core SG&A expenses came primarily from lower advertising expenses across the company, lower acquisition costs in consumer markets -- primarily a reduction in the use of checks to acquire customers, and lower marketing and sales expenses in business markets. Our year-over-year growth in SG&A expenses declined each quarter in 1997. Partially offsetting our savings were higher retention and acquisition costs in wireless markets. We invested heavily in migrating wireless customers to digital service in 1997, which lowers costs over time. These migration costs plus the costs of servicing a growing wireless customer base caused the Form 8-K/A AT&T Corp. October 16, 1998 increase in overall wireless customer costs. However, cost per customer acquisition in cellular markets was 4.7% lower in 1997 than in 1996 as a result of our focus on less expensive distribution channels. Selling, general and administrative expenses increased $1,660 million, or 12.7%, in 1996 due to expenditures for new initiatives, higher marketing and sales expenses, and enhancements to customer care facilities. Our initiatives represented about 40% of our increase in 1996. We have established processes for evaluating and managing the risks and costs associated with preparing our systems, global networks and applications for the year 2000. We expect to incur internal staff costs as well as consulting and other expenses related to the conversion and testing of our systems, global networks and applications. We expect the cost of this project to be approximately $300 million in 1998. More than half of these costs represent internal information technology resources that have been redeployed from other projects and are expected to return to these projects upon completion. We plan on having substantially all modifications completed by the end of 1998, leaving a full year for testing. We are still assessing the impact to us, if any, in 1999. Also included in SG&A expenses were $851 million, $822 million and $727 million of research and development expenses in 1997, 1996 and 1995, respectively. Research and development expenditures are mainly for work on advanced communications services and projects aimed at IP services. In the fourth quarter of 1995 we recorded a pre-tax charge of $3,023 million to cover restructuring costs of $2,301 million and asset impairments and other charges of $722 million. 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. Dollars in Millions For the Years Ended December 31 1997 1996 1995 Other income - net $443 $405 $270 Other income - net in 1997 included the gain on the sale of AT&T Skynet ($97 million), gains and losses on sales of cellular investments, increases in the value of corporate-owned life insurance policies on officers, net equity earnings from investments and other miscellaneous transactions, none of which are individually significant. In 1996 other income - net included sales and exchanges of cellular properties, increases in the value of corporate-owned life insurance policies on officers, net equity earnings from investments and other miscellaneous transactions. In addition, other income for 1996 included a loss on our investment in Novell, Inc. Form 8-K/A AT&T Corp. October 16, 1998 Dollars in Millions EBIT For the Years Ended December 31 1997 1996 1995 Total AT&T* $7,279 $9,114 $5,439 Wireless services $265 $627 $430 *Includes restructuring and other charges of $3,023 in 1995 EBIT decreased $1,835 million, or 20.1%, in 1997 primarily as a result of increases in network and other communications services expenses and depreciation and amortization expenses partially offset by increased revenues. As discussed above, the higher depreciation expense relates primarily to our core business, while investment in initiatives drove the increased network and other communications services expenses. EBIT increased $3,675 million, or 67.6%, in 1996 compared with 1995. Excluding the $3,023 million restructuring and other charges in 1995, EBIT increased $652 million, or 7.7%, in 1996 primarily due to an increase in revenues and a decrease in access and other interconnection expenses partially offset by increases in both SG&A expenses and network and other communications services expenses. Wireless services EBIT in 1997 contained a $160 million charge to exit the two-way messaging business as well as increased dilution from wireless initiatives. EBIT for wireless services for 1996 contained a gain on the exchange of several wireless properties. Dollars in Millions For the Years Ended December 31 1997 1996 1995 Interest expense $307 $417 $514 Interest expense decreased $110 million, or 26.4%, in 1997 due to lower levels of average debt and a higher proportion of capitalized interest partially offset by higher average interest rates on debt. Average debt was higher in 1996 due to the additional debt associated with Lucent. We capitalized a greater proportion of our interest expense in 1997 primarily due to higher qualifying assets for our local initiative. Interest expense decreased $97 million, or 18.9%, in 1996 compared with 1995 due to lower levels of average debt and a higher proportion of capitalized interest partially offset by a higher average interest rates on debt. Lower levels of average debt were primarily attributable to the assignment of debt to Lucent and the application of the proceeds from the sale of AT&T Capital. Dollars in Millions For the Years Ended December 31 1997 1996 1995* Provision for income taxes $2,723 $3,239 $1,944 *Includes restructuring and other charges of $991 The effective income tax rate is the provision for income taxes as a percentage of income from continuing operations before income taxes. The effective income tax rate was 39.0% in 1997, 37.2% in 1996 and 39.5% in 1995. The effective tax rate in 1997 was impacted by investment dispositions announced in 1997. The 1996 effective income tax rate was reduced by tax benefits associated with various legal entity restructurings while the 1995 rate was impacted by higher research Form 8-K/A AT&T Corp. October 16, 1998 credits. The 1995 effective tax rate excluding restructuring and other charges was 36.9%. 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. Interest and taxes are not allocated to these initiatives, therefore, EBIT is used as the measure of profitability. We use EBITDA as the measure of our ability to generate cash flow and is designated as a proxy for liquidity. Accordingly, all data presented represent approximate amounts. Dollars in Millions Local Services Initiative For the Years Ended December 31 1997 1996 1995 EBIT $ (991) $ (466) $(185) EBITDA $ (764) $ (378) $(147) Capital Expenditures $ 1,308 $ 892 $ 155 - We continue to work to provide local service to business and residential customers across the country. In 1997 we introduced AT&T Digital Link local service for medium- and large-sized businesses. At the end of 1997 AT&T Digital Link service was available in 49 states for outbound local calling. Inbound capability, however, was and remains delayed by the lack of local number portability and other factors. Our merger with TCG is an aggressive move to expand our reach and propel our entry into the market for business local service and dedicated access. TCG services enhance our ability to provide integrated end-to-end services for large and small business customers. AT&T can now offer single points of contact for local and long-distance services and customer care, enterprise solutions for businesses with multiple locations, volume discounts across services and an integrated bill for customers who want it. We are integrating local service into our business offers throughout TCG's 83 markets. In residential markets at the end of 1997 we offered resold local service in seven states. However, in spite of strong demand, in the fourth quarter we stopped actively marketing resold local service to residential and small business customers in most of these areas because of the limitations on the local exchange carriers' ability to handle anticipated demand and because the discounts we receive from the local exchange carriers on the sale of these services are insufficient to make resale a viable long-term method of offering service. The economic conditions of the total services resale approach simply do not allow us to provide local service profitably. During the first quarter of 1998 AT&T recorded a pre-tax charge of $601 million related to the Company's decision not to pursue Total Services Resale (TSR) as a local service strategy. The impact on net income was a reduction of $371 million. In addition, certain fixed assets which were purchased as part of the TSR initiative may also be impaired. These assets are currently being evaluated in conjunction with the TCG merger to determine if any assets are impaired. Management expects to complete this review by the end of the fourth quarter. Form 8-K/A AT&T Corp. October 16, 1998 Nevertheless, despite the difficulty of the regulatory environment, local service is a key growth opportunity and AT&T continues its financial and operational review of the various alternatives for entering the local market, including the impacts associated with the merger of TCG and the pending acquisition of Tele-Communications, Inc. (TCI). Dollars in Millions Wireless Initiatives For the Years Ended December 31 1997 1996 1995 EBIT $(559) $(170) $ - EBITDA $(426) $(148) $ - Capital Expenditures $ 896 $ 842 $ - Our wireless initiatives include wireless service in new markets, wireless data services, two-way messaging as well as the technology associated with fixed wireless development. Our primary wireless initiative is to provide services in new markets on the 1.9 GHz spectrum purchased in the FCC's "A and B Block" auction in 1996. During 1997 we activated nine systems: Phoenix/Tucson in the second quarter; Atlanta and Chicago in the third quarter, and Philadelphia, Washington D.C./Baltimore, Cleveland, Charlotte, St. Louis and Detroit in the fourth quarter. In addition, we activated our system in Boston in January 1998. These markets extend the availability of AT&T Digital PCS, which has already been introduced in AT&T's 850 MHz markets, and extends into Canada through our partnership with Cantel. Also, in order to extend the reach of AT&T's digital wireless services, we have announced a number of partnerships with other wireless carriers. Through September 1998 we had announced agreements with Tritel, Inc., Triton PCS, Telecorp, and Cincinnati Bell, as well as an interoperability agreement with Dobson Communications. These agreements will allow us to achieve a build-out of certain license areas with minimal capital investment. The increased EBIT dilution from wireless initiatives in 1997 primarily relates to a $160 million charge to exit the two-way messaging business, as well as expenses related to the activation of the new 1.9 GHz markets. Dollars in Millions Other Initiatives For the Years Ended December 31 1997 1996 1995 EBIT $(1,097) $(975) $(392) EBITDA $ (917) $(888) $(283) Capital Expenditures $ 308 $ 245 $ 159 Other initiatives include AT&T Solutions, AT&T WorldNet and other online Form 8-K/A AT&T Corp. October 16, 1998 services, and international markets (excluding bilateral traffic). AT&T Solutions continued to grow and made progress in 1997 toward achieving profitability. We expect AT&T Solutions to turn profitable in 1998. In 1997 AT&T Solutions won contracts with such companies as 1-800-FLOWERS, Bear Stearns, Hallmark, Royal Bank of Canada, Chung Hwa Telecommunications, PT Telkom, Norwest Bank, Best Buy and United Airlines. EBIT dilution from AT&T Solutions decreased 53% in 1997 and increased 4% in 1996. In 1997 we continued to develop our presence in the Internet access and electronic commerce businesses through our online services such as AT&T WorldNet and electronic commerce businesses. AT&T WorldNet signed up its one-millionth customer in the fourth quarter of 1997 and finished the year with 1.01 million Internet access customers. This represents an increase of 443,000 subscribers for the year. As AT&T WorldNet's initial promotional activity began to expire in 1997, subscriber growth slowed as many customers who were receiving the free promotion deactivated service. We continue to explore ways of growing the Internet access business and realizing synergies between it and other AT&T businesses. For example, in January 1998 we announced a long-distance offer targeting Internet access customers. Beginning in March 1998 AT&T WorldNet customers can sign up for long-distance services via AT&T's Web site and receive a rate of nine cents per minute. Globally, we focused our strategy on serving multinational corporations and global travelers and expanding our North American franchise in Canada and Mexico. However, equity losses from Alestra, our Mexican joint venture with Grupo Alfa and VISA-Bancomer, exceeded our expectations in 1997. AT&T and British Telecommunications PLC (BT) announced on July 26, 1998 that they will create a global venture to serve the complete communications needs of multinational companies and the international calling needs of individuals and businesses around the world. The venture, which will be owned equally by AT&T and BT, will combine trans-border assets and operations of each company, including their existing international networks, all of their international traffic, all of their trans-border products for business customers -- including an expanding set of Concert services -- and AT&T and BT's multinational accounts in selected industry sectors. The formation of the venture is subject to certain conditions, including receipt of regulatory approvals and the purchase by BT of MCI Communication Corporation's interest in Concert and the final negotiation and execution of definitive documents. The transaction is expected to be completed within 12 months. Based on the merger agreement, AT&T may be required to exit certain operations which compete directly with BT. A full review is currently underway to determine the size and scope of any international restructurings. Management expects to have definitive plans in place by the end of 1998, and accordingly, a restructuring charge associated with this review will be forthcoming. Form 8-K/A AT&T Corp. October 16, 1998 LIQUIDITY Dollars in Millions For the Years Ended December 31 1997 1996 1995 CASH FLOW: Provided by operating activities $ 8,501 $ 8,087 $ 8,229 Used in investing activities (6,755) (2,088) (8,363) (Used in)provided by financing activities (1,540) (4,295) 1,612 EBITDA - Total AT&T* $11,327 $11,995 $ 8,112 EBITDA - Wireless services $ 1,227 $ 1,348 $ 986 *Includes restructuring and other charges of $3,023 in 1995 All cash flow discussions pertain to cash flows from continuing operations. Cash flow from operations increased $414 million, or 5.1%, in 1997 and decreased $142 million, or 1.7%, in 1996. A number of factors drove the increase in 1997 including the collection of employee-benefit-related receivables from Lucent in 1997 and improved customer cash collections across the company. In addition, 1996 cash flow from operations included a $300 million net prepayment to Lucent. The decrease in 1996 related mainly to required cash payments for restructuring and other charges amounting to $471 million. Form 8-K/A AT&T Corp. October 16, 1998 Included in 1997 investing activities were net capital expenditures, the net funding requirements for UCS, acquisitions of licenses and proceeds received from divestments. We continued to fund the UCS operations up until its sale in April, 1998. Our assets, therefore, included short- and long-term notes receivable from UCS, and our debt included external debt used to fund UCS. In accordance with the purchase agreement, at the time of sale in 1998 we received $5,722 million from Citibank for the notes receivable from UCS. Cash used in investing activities increased significantly in 1997 compared with 1996 primarily as a result of the lower level of credit card receivables securitized in 1997 by UCS ($1 billion) versus receivables securitized in 1996 ($3 billion). Due to the significant cash generated from the 1996 securitizations, UCS lowered its debt requirements and subsequently repaid $3,360 million of its notes payable to us. In 1997, with reduced securitizations and a growing portfolio, UCS increased its notes payable to us. Capital expenditures, acquisitions of marketable securities, investments, licenses and businesses amounted to $8,149 million in 1997, $8,110 million in 1996 and $10,199 million in 1995. This resulted in net cash outlays for these categories in 1997, 1996 and 1995 of $8,039 million, $7,854 million and $10,176 million, respectively. We expect our 1998 capital expenditures to be about $8 billion. These expenditures include the completion of our three-year program of SONET deployment as well as additional capital to meet our customers' needs for new technology and increased capacity in long-distance, wireless, WorldNet and local services. Form 8-K/A AT&T Corp. October 16, 1998 In 1997 we raised substantially all necessary external financing through issuances of commercial paper. We expect to be able to arrange any necessary future financing using issuances of commercial paper, long-term debt and equity, with the timing of issue, principal amount and form depending on our needs and the prevailing market and economic conditions. We do not anticipate requiring additional external financing in 1998 to fund capital expenditures and dividend payments. During 1997 we retired long-term debt of $737 million and increased short-term borrowings by $1,114 million. The increase in short-term debt was primarily due to increased funding requirements of UCS. In 1996 we retired long-term debt of $1,497 million and decreased short-term debt by $5,301 million. The changes in debt reflected the use of alternative sources of funding, such as securitization, as well as Lucent's use of its own external financing in 1996. Additionally, the cash collection of the $2.0 billion in accounts receivable retained by AT&T continuing operations as part of the 1995 restructuring plan and the proceeds of $1.8 billion from the sale of AT&T Capital were used to pay down our debt. During 1995 we retired $2,143 million of long-term debt, but borrowed an additional $2,551 million of long-term debt and $1,978 million of short-term debt. In 1997 we obtained substantially all of the stock for our shareowner and employee benefit stock-ownership plans in the open market rather than issuing new shares. This required us to use the cash received from shareowners and employees to purchase the shares. In 1996 and 1995 the stock used in our shareowner and employee benefit stock-ownership plans was issued from unissued or treasury shares. Accordingly, during those years we kept the more than $1.2 billion of cash received from shareowners and employees for the issuances of shares. We paid dividends of $2,142 million in 1997, $2,122 million in 1996 and $2,088 million in 1995. As we issue shares in 1998, as in connection with the Form 8-K/A AT&T Corp. October 16, 1998 TCG merger and TCI acquisition, dividend payments will increase, assuming that the company's dividend policy remains the same. To support future needs, the proposal to increase the number of authorized shares from 2 billion to 6 billion was approved at the annual shareholders' meeting in May 1998. In July 1998, AT&T's Board of Directors authorized an open market share repurchase program to repurchase up to $3 billion of AT&T common stock. We began repurchasing shares in the third quarter of 1998 and intend to reissue the repurchased shares as part of the shares to be issued in connection with the TCI merger. In August 1998, AT&T extinguished approximately $1 billion of debt. The early extinguishment of this debt resulted in a pre-tax charge to AT&T of $217 million ($137 million after-tax) and was recorded as an extraordinary loss. EBITDA is a measure of our ability to generate cash flow and should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with generally accepted accounting principles. The decrease of $668 million, or 5.6%, in 1997 was due primarily to an increase in network and other communications services expenses partially offset by increased revenues. Excluding the 1995 restructuring and other charges, EBITDA increased $860 million in 1996, or 7.7%, 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. Form 8-K/A AT&T Corp. October 16, 1998 RISK MANAGEMENT We are exposed to market risk from changes in interest and foreign exchange rates. On a limited basis we use certain derivative financial instruments including interest rate swaps, options, forwards and other derivative contracts to manage these risks. We do not use financial instruments for trading or speculative purposes. All financial instruments are used in accordance with board-approved policies. We use interest rate swaps to manage the impact of interest rate changes on earnings and cash flows and also to lower our overall borrowing costs. We monitor our interest rate risk on the basis of changes in fair value. Assuming a 10% downward shift in interest rates at December 31, 1997, the potential loss in the net change in the fair value of interest rate swaps and the underlying hedged debt would have been $3 million. Assuming a 10% downward shift in interest rates at December 31, 1997, the potential loss in the net change in fair value of unhedged debt would have been $346 million. We use forward and option contracts to reduce our exposure to the risk of adverse changes in currency exchange rates. We are subject to foreign exchange risk related to reimbursements to foreign telephone companies for their portion of the revenues billed by AT&T for calls placed in the U.S. to a foreign country. In addition, we are also subject to foreign exchange risk related to other foreign-currency-denominated transactions. As of December 31, 1997, there was a net unrealized loss on forward contracts of $30 million, calculated based on the difference between the contract rate and the rate available to terminate the contracts. We monitor our foreign exchange rate risk on the basis of changes Form 8-K/A AT&T Corp. October 16, 1998 in fair value. Additional potential losses in the net fair value of these contracts, assuming a 10% appreciation in the U.S. dollar at December 31, 1997, would have been $6 million. Because these contacts are entered into for hedging purposes, we believe that these losses would be largely offset by gains on the underlying firmly committed or anticipated transactions. The estimated potential losses, as discussed above, assume the occurrence of certain adverse market conditions. They do not consider the potential effect of favorable changes in market factors and do not represent projected losses in fair value that we expect to incur. Future impacts would be based on actual developments in global financial markets. Our management does not foresee any significant changes in the strategies used to manage interest rate risk or foreign currency rate risk in the near future. FINANCIAL CONDITION Dollars in Millions At December 31 1997 1996 Total assets $61,095 $57,348 Total assets from continuing operations $59,994 $55,838 Total assets from continuing operations increased $4,156 million, or 7.4%, in 1997 primarily due to increases in property, plant and equipment, long-term receivables and other assets, partially offset by decreases in other receivables and accounts receivable. The increase in property, plant and equipment resulted from investments in the network. The increase in other assets is driven by an increase in deferred charges as well as goodwill associated with the acquisitions of several local businesses, while both the increase in long-term receivables and the decrease in other receivables are related to notes receivable from UCS. As a result of UCS becoming a discontinued operation, our balance sheet for continuing operations reflected the receivable from UCS that was paid by Citibank as well as the external debt associated with procuring debt on behalf of UCS. In total, the receivable from UCS increased $441 million. The decrease in accounts receivable was primarily a result of our lower fourth-quarter consumer long-distance revenue. Form 8-K/A AT&T Corp. October 16, 1998 Dollars in Millions At December 31 1997 1996 Total liabilities $37,417 $36,256 Total liabilities increased $1,161 million, or 3.2%, in 1997 primarily as a result of increases in both deferred income taxes and total outstanding debt. The increase in deferred income taxes was mainly a result of the difference in book and tax basis for our property, plant and equipment, while debt increased due to increased funding requirements for UCS. Dollars in Millions At December 31 1997 1996 Total shareowners' equity $23,678 $21,092 Shareowners' equity increased $2,586 million, or 12.3%, in 1997. The increase was driven by net income, partially offset by 1997 dividends. At December 31 1997 1996 Debt ratio 33.5% 35.0% Our debt ratio declined slightly in 1997 due to the increase in shareowners' equity as discussed above. In 1998 we expect our debt ratio to decrease further as we utilize expected cash proceeds from asset dispositions to retire a certain amount of outstanding debt as well as to extinguish approximately $1 billion of debt in August 1998. Form 8-K/A AT&T Corp. October 16, 1998 SUBSEQUENT EVENTS On June 24, 1998, AT&T signed a definitive merger agreement with TCI for an all-stock transaction. Under the agreement, AT&T will issue 0.7757 shares of AT&T common stock for each share of TCI Group Series A common stock and 0.8533 shares of AT&T common stock for each share of TCI Group Series B stock. The transaction, which is subject to regulatory, shareowner and other approvals, is expected to be completed in the first half of 1999. Also announced was TCI's intention to combine Liberty Media Group, its programming arm, and TCI Ventures Group, its technology investments unit, to form the new Liberty Media Group. Upon closing of the AT&T/TCI merger, the shareowners of the new Liberty Media Group will be issued separate tracking stock by AT&T in exchange for the shares currently held in Liberty Media Group and TCI Ventures Group. AT&T and British Telecommunications PLC (BT) announced on July 26, 1998 that they will create a global venture to serve the complete communications needs of multinational companies and the international calling needs of individuals and businesses around the world. The venture, which will be owned equally by AT&T and BT, will combine trans-border assets and operations of each company, including their existing international networks, all of their international traffic, all of their trans-border products for business customers -- including an expanding set of Concert services -- and AT&T and BT's multinational accounts in selected industry sectors. The formation of the venture is subject to certain conditions, including receipt of regulatory approvals and the purchase by BT of MCI Communication Corporation's interest in Concert and the final negotiation and execution of definitive documents. The transaction is expected to be completed within 12 months. Form 8-K/A AT&T Corp. October 16, 1998 RECENT PRONOUNCEMENTS Beginning with the 1998 annual report we will adopt SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes the standards for the manner in which public enterprises are required to report financial and descriptive information about their operating segments. The standard defines operating segments as components of an enterprise for which separate financial information is available and evaluated regularly as a means for assessing segment performance and allocating resources to segments. A measure of profit or loss, total assets and other related information are required to be disclosed for each operating segment. In addition, this standard requires the annual disclosure of: information concerning revenues derived from the enterprise's products or services; countries in which it earns revenues or holds assets, and major customers. In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." Among other provisions, it standardizes certain disclosure requirements for pension and other postretirement benefits, requires additional information on changes in the benefit obligations and fair values of plan assets, and eliminates certain other disclosures. The standard is effective for fiscal years beginning after December 15, 1997. For AT&T this means that the standard is effective for the 1998 annual report. Since the standard applies only to the presentation of pension and other postretirement benefit information, it will not have any impact on AT&T's results of operations, financial position or cash flows. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Among other provisions, the SOP requires that entities capitalize certain internal-use software costs once certain criteria are met. The SOP is effective for financial statements for fiscal years beginning after December 15, 1998, though early adoption is encouraged. For AT&T this means that it must be adopted no later than January 1, 1999. If AT&T elects to adopt the SOP earlier than the effective date, restatement of interim periods during the year of adoption is required. Management is currently assessing the impact on AT&T's consolidated financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Among other provisions, it requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains and losses resulting from changes in the fair values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. This standard is effective for fiscal years beginning after June 15, 1999, though earlier adoption is encouraged and retroactive application is prohibited. For AT&T this means that the standard must be adopted no later than January 1, 2000. Management does not expect the adoption of this standard to have a material impact on AT&T's results of operations, financial position or cash flows. Form 8-K/A AT&T Corp. October 16, 1998 FORWARD LOOKING STATEMENTS Except for the historical statements and discussions contained herein, statements contained in this report constitute "forward looking statements" within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward looking statements rely on a number of assumptions concerning future events, and are subject to a number of uncertainties and other factors, many of which are outside our control, that could cause actual results to differ materially from such statements. Readers are cautioned not to put undue reliance on such forward looking statements. These factors and uncertainties include the adoption of balanced and effective rules and regulations by the state public regulatory agencies, our ability to achieve a significant market penetration in new markets and the related costs thereof, and competitive pressures. Shareowners may view our reports filed with the Securities and Exchange Commission for a more detailed description of the uncertainties and other factors that could cause actual results to differ materially from such forward looking statements. We disclaim any intention or obligation to update or revise forward looking statements, whether as a result of new information, future events or otherwise. Form 8-K/A AT&T Corp. October 16, 1998 FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (UNAUDITED) AT&T Corp. and Subsidiaries Dollars in millions (except per share amounts) 1997 1996 1995* 1994 1993* RESULTS OF OPERATIONS Revenues $51,577 $50,688 $48,449 $46,063 $43,779 Operating income 6,836 8,709 5,169 7,393 6,556 Income from continuing operations Before cumulative effects of accounting changes 4,249 5,458 2,981 4,230 3,768 Income before cumulative effects of accounting changes 4,415 5,793 85 4,680 3,684 Net income(loss) 4,415 5,793 85 4,680 (5,924) Earnings per common share-basic: Income from continuing operations before cumulative effects of accounting changes 2.39 3.10 1.72 2.48 2.23 Income before cumulative effects of accounting changes 2.48 3.29 0.05 2.74 2.18 Net income(loss) 2.48 3.29 0.05 2.74 (3.51) Earnings per common share-diluted: Income from continuing operations before cumulative effects of accounting changes 2.38 3.09 1.71 2.47 2.22 Income before cumulative effects of accounting changes 2.47 3.28 0.05 2.73 2.17 Net income(loss) 2.47 3.28 0.05 2.73 (3.49) Dividends declared per common share 1.32 1.32 1.32 1.32 1.32 Form 8-K/A AT&T Corp. October 16, 1998 FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (UNAUDITED) AT&T Corp. and Subsidiaries Dollars in millions (except per share amounts) 1997 1996 1995* 1994 1993* ASSETS AND CAPITAL Property, plant and equipment-net $24,203 $20,803 $16,453 $14,721 $13,913 Total assets- continuing operations 59,994 55,838 54,365 47,926 41,718 Total assets 61,095 57,348 62,864 57,817 50,388 Long-term debt 7,857 8,878 8,913 9,138 10,317 Total debt 11,942 11,351 21,081 18,720 18,251 Shareowners' equity 23,678 21,092 17,400 18,100 13,583 Gross capital expenditures 7,714 7,084 4,659 3,504 2,692 Employees-continuing Operations 130,800 128,700 126,100 116,400 118,800 OTHER INFORMATION Operating income as a percentage of revenues 13.3% 17.2% 10.7% 16.1% 15.1% Income from continuing operations as a percentage of revenues 8.2% 10.8% 6.2% 9.2% 8.7% Return on average common Equity 19.7% 27.1% 0.4% 29.5% (49.1)% Data at year-end: Stock price per share** $61.31 $41.31 $44.40 $34.46 $36.00 Book value per Common share $13.24 $11.89 $9.97 $10.53 $8.01 Debt ratio 33.5% 35.0% 54.8% 50.8% 57.3% * 1995 continuing operations data reflect $3.0 billion of pretax business restructuring and other charges. 1993 net income reflects a $9.6 billion net charge for three accounting changes. ** Stock prices for 1993-1996 have been restated to reflect the spin-offs of Lucent and NCR. Form 8-K/A AT&T Corp. October 16, 1998 CONSOLIDATED STATEMENTS OF INCOME AT&T CORP. AND SUBSIDIARIES For the Years Ended December 31 Dollars in millions (except per share amounts) 1997 1996 1995 Revenues................................... $51,577 $50,688 $48,449 Operating Expenses Access and other interconnection........... 16,350 16,363 17,647 Network and other communications services.. 9,412 8,063 6,913 Depreciation and amortization.............. 3,982 2,819 2,623 Selling, general and administrative........ 14,997 14,734 13,074 Restructuring and other charges ........... - - 3,023 Total operating expenses................... 44,741 41,979 43,280 Operating income........................... 6,836 8,709 5,169 Other income-net........................... 443 405 270 Interest expense........................... 307 417 514 Income from continuing operations before income taxes............................. 6,972 8,697 4,925 Provision for income taxes................. 2,723 3,239 1,944 Income from continuing operations.......... 4,249 5,458 2,981 Discontinued Operations Income(loss) from discontinued operations (net of taxes of $50 in 1997, $(353) in 1996 and $(1,147) in 1995)............ 100 173 (2,896) Gain on sale of discontinued operations (net of taxes of $43 in 1997 and $138 in 1996)............................ 66 162 - Net income ................................ $ 4,415 $ 5,793 $ 85 Weighted-average common shares and potential common shares (millions)*...... 1,789 1,767 1,741 Per Common Share-Basic: Income from continuing operations.......... $ 2.39 $ 3.10 $ 1.72 Income(loss) from discontinued operations.. 0.05 0.10 (1.67) Gain on sale of discontinued operations.... 0.04 0.09 - Net income................................. $ 2.48 $ 3.29 $ 0.05 Per Common Share-Diluted: Income from continuing operations.......... $ 2.38 $ 3.09 $ 1.71 Income(loss) from discontinued operations.. 0.05 0.10 (1.66) Gain on sale of discontinued operations.... 0.04 0.09 - Net income................................. $ 2.47 $ 3.28 $ 0.05 * Amounts represent the weighted-average shares assuming dilution from the potential exercise of outstanding stock options. Amounts are reduced by 8 million, 7 million and 7 million shares for 1997, 1996 and 1995, respectively, assuming no dilution. The notes are an integral part of the consolidated financial statements. Form 8-K/A AT&T Corp. October 16, 1998 CONSOLIDATED BALANCE SHEETS AT&T CORP. AND SUBSIDIARIES At December 31 Dollars in millions 1997 1996 ASSETS Cash and cash equivalents $ 318 $ 196 Marketable securities 307 441 Receivables, less allowances of $988 and $948 Accounts receivable 8,675 9,024 Other receivables 5,684 6,141 Deferred income taxes 1,252 1,265 Other current assets 541 708 TOTAL CURRENT ASSETS 16,777 17,775 Property, plant and equipment-net 24,203 20,803 Licensing costs, net of accumulated amortization of $1,076 and $913 8,368 8,071 Investments 3,866 4,001 Long-term receivables 1,794 873 Prepaid pension costs 2,156 1,933 Other assets 2,830 2,382 Net assets of discontinued operations 1,101 1,510 TOTAL ASSETS $61,095 $57,348 LIABILITIES Accounts payable $ 6,402 $ 6,207 Payroll and benefit-related liabilities 2,390 2,641 Debt maturing within one year 4,085 2,473 Dividends payable 538 536 Other current liabilities 3,902 4,456 TOTAL CURRENT LIABILITIES 17,317 16,313 Long-term debt 7,857 8,878 Long-term benefit-related liabilities 3,142 3,037 Deferred income taxes 5,711 4,827 Other long-term liabilities and deferred credits 3,390 3,201 TOTAL LIABILITIES 37,417 36,256 SHAREOWNERS' EQUITY Common shares, par value $1 per share 1,789 1,774 Authorized shares: 2,000,000,000 Outstanding shares: 1,789,013,000 at December 31, 1997; 1,774,314,000 at December 31, 1996 Additional paid-in capital 17,121 16,624 Guaranteed ESOP obligation (70) (96) Retained Earnings 4,876 2,790 Accumulated Other Comprehensive Income (38) - TOTAL SHAREOWNERS' EQUITY 23,678 21,092 TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $61,095 $57,348 The notes are an integral part of the consolidated financial statements. Form 8-K/A AT&T Corp. October 16, 1998 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY AT&T CORP. AND SUBSIDIARIES For the Years Ended December 31 Dollars in millions 1997 1996 1995 Common Shares Balance at beginning of year $ 1,774 $ 1,746 $ 1,719 Shares issued, net: Under employee plans 2 20 13 Under shareowner plans - 8 13 For acquisitions 6 - - Other 7 - 1 Balance at end of year 1,789 1,774 1,746 Additional Paid-In Capital Balance at beginning of year 16,624 16,656 15,887 Shares issued(acquired), net: Under employee plans (8) 975 598 Under shareowner plans 9 434 687 For acquisitions 117 23 - Other 379 286 11 Dividends declared - - (527) Spin-offs of Lucent and NCR - (2,326) - Debt conversion - 264 - Reorganization - 312 - Balance at end of year 17,121 16,624 16,656 Guaranteed ESOP Obligation Balance at beginning of year (96) (254) (305) Amortization 26 52 51 Assumption by Lucent - 106 - Balance at end of year (70) (96) (254) Retained Earnings(Deficit) Balance at beginning of year 2,790 (773) 704 Net income 4,415 $4,415 5,793 $5,793 85 $85 Dividends declared (2,145) (2,132) (1,570) Treasury shares issued at less than cost (187) - - Reorganization - (101) - Other changes 3 3 8 Balance at end of year 4,876 2,790 (773) Accumulated Comprehensive Income Balance at beginning of year - 25 95 Other Comprehensive Income (net of taxes of $(24),$42,$72) (38) (38) (25) (25) (70) (70) Total comprehensive income $4,377 $5,768 $15 Balance at end of year (38) - 25 Total Shareowners' Equity $23,678 $21,092 $17,400 In March 1990 we issued 13.4 million new shares of common stock in connection with the establishment of an ESOP feature for the nonmanagement savings plan. The shares are being allocated to plan participants over ten years commencing in July 1990 as contributions are made to the plan. We have 100 million authorized shares of preferred stock at $1 par value. No preferred stock is currently issued or outstanding. The notes are an integral part of the consolidated financial statements. Form 8-K/A AT&T Corp. October 16, 1998 CONSOLIDATED STATEMENTS OF CASH FLOWS AT&T CORP. AND SUBSIDIARIES For the Years Ended December 31 Dollars in millions 1997 1996 1995 OPERATING ACTIVITIES Net income $ 4,415 $ 5,793 $ 85 Add:(Income)loss from discontinued operations (100) (173) 2,896 Gain on sale of discontinued operations (66) (162) - Income from continuing operations 4,249 5,458 2,981 Adjustments to reconcile net income to net cash provided by operating activities of continuing operations: Gains on sales (134) (158) (64) Restructuring and other charges - - 3,023 Depreciation and amortization 3,982 2,819 2,623 Provision for uncollectibles 1,522 1,518 1,125 Increase in accounts receivable (1,034) (1,731) (1,766) Increase in accounts payable 125 679 908 Net increase in other operating assets and liabilities (832) (1,064) (63) Other adjustments for noncash items-net 623 566 (538) NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 8,501 8,087 8,229 INVESTING ACTIVITIES Capital expenditures (7,604) (6,828) (4,736) Proceeds from sale or disposal of property, plant and equipment 169 145 204 (Increase)decrease in finance assets (465) 3,499 1,845 Acquisitions of licenses (435) (267) (1,978) Sales of marketable securities 479 665 - Purchases of marketable securities (345) (1,106) - Equity investment distributions and sales 583 186 168 Equity investment contributions (484) (504) (224) Dispositions(acquisitions), net of cash acquired 1,507 2,145 (3,406) Other investing activities-net (160) (23) (236) NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING OPERATIONS (6,755) (2,088) (8,363) FINANCING ACTIVITIES Proceeds from long-term debt issuances - 1,060 2,551 Retirements of long-term debt (737) (1,497) (2,143) Issuance of common shares-net 171 1,580 1,214 Dividends paid (2,142) (2,122) (2,088) Increase(decrease) in short-term borrowings-net 1,114 (5,301) 1,978 Other financing activities-net 54 1,985 100 NET CASH (USED IN)PROVIDED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS (1,540) (4,295) 1,612 Net cash used in discontinued operations (84) (1,595) (1,544) Net increase(decrease) in cash and cash equivalents 122 109 (66) Cash and cash equivalents at beginning of year 196 87 153 Cash and cash equivalents at end of year $ 318 $ 196 $ 87 The notes are an integral part of the consolidated financial statements. Form 8-K/A AT&T Corp. October 16, 1998 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AT&T CORP. AND SUBSIDIARIES (AT&T) (Dollars in millions unless otherwise noted, except per share amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include all majority-owned subsidiaries. Investments in which we exercise significant influence but which we do not control (generally a 20% - 50% ownership interest) are accounted for under the equity method of accounting. This represents the majority of our investments. Generally, investments in which we have less than a 20% ownership interest are accounted for under the cost method of accounting. CURRENCY TRANSLATION For operations outside of the U.S. that prepare financial statements in currencies other than the U.S. dollar, we translate income statement amounts at average exchange rates for the year and we translate assets and liabilities at year-end exchange rates. We present these translation adjustments as a separate component of shareowners' equity. REVENUE RECOGNITION We recognize wireline and wireless services revenue based upon minutes of traffic processed and contracted fees. We recognize products and other services revenue when the products are delivered and accepted by customers and when services are provided in accordance with contract terms. ADVERTISING AND PROMOTIONAL COSTS We expense costs of advertising and promotions, including checks used to acquire customers, as incurred. Advertising and promotional expenses were $1,995, $2,533 and $2,150 in 1997, 1996 and 1995, respectively. INVESTMENT TAX CREDITS We amortize investment tax credits as a reduction to the provision for income taxes over the useful lives of the property that produced the credits. EARNINGS PER SHARE We calculate earnings per share in accordance with Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share." We use the weighted-average number of common shares outstanding during each period to compute basic earnings per common share. Diluted earnings per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding. Dilutive potential common shares are additional common shares assumed to be exercised. Form 8-K/A AT&T Corp. October 16, 1998 CASH EQUIVALENTS We consider all highly liquid investments with original maturities of generally three months or less to be cash equivalents. MARKETABLE SECURITITES Marketable securities consist principally of fixed income securities, U.S. Treasury Bills, commercial paper, floating rate notes, federal agency notes, federal agency discount notes, corporate medium-term notes, corporate notes, bank notes and certificates of deposit with original maturity dates greater than three months. The carrying value of these securities approximates market value. Market value is determined by the most recently traded price of the security at the balance sheet date. All marketable securities are classified as available for sale securities under the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Unrealized holding gains and losses are determined on the specific identification method. PROPERTY, PLANT AND EQUIPMENT We state property, plant and equipment at cost, unless impaired, and determine depreciation based upon the assets' estimated useful lives using either the group or unit method. The useful lives of communications and network equipment range from three to fifteen years. The useful lives of buildings and improvements range from ten to forty years. The useful lives of other equipment ranges from three to seven years. 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. Form 8-K/A AT&T Corp. October 16, 1998 DERIVATIVE FINANCIAL INSTRUMENTS We use various financial instruments, including derivative financial instruments, for purposes other than trading. We do not use derivative financial instruments for speculative purposes. Derivatives, used as part of our risk management strategy, must be designated at inception as a hedge and measured for effectiveness both at inception and on an ongoing basis. Gains and losses related to qualifying hedges of foreign currency firm commitments are deferred in other assets or liabilities and recognized as part of the underlying transactions as they occur. All other foreign exchange contracts are marked to market on a current basis and the respective gains or losses are recognized in other income-net. Interest rate differentials associated with interest rate swaps used to hedge AT&T's debt obligations are recorded as an adjustment to interest payable or receivable with the offset to interest expense over the life of the swaps. If we terminate an interest rate swap agreement, the gain or loss is recorded as an adjustment to the basis of the underlying asset or liability and amortized over the remaining life. Cash flows from financial instruments are classified in the Consolidated Statements of Cash Flows under the same categories as the cash flows from the related assets, liabilities or anticipated transactions. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ from those estimates. Estimates are used when accounting for certain items such as long-term contracts, allowance for doubtful accounts, depreciation and amortization, employee benefit plans, taxes, restructuring reserves and contingencies. CONCENTRATIONS As of December 31, 1997, we do not have any significant concentration of business transacted with a particular customer, supplier or lender that could, if suddenly eliminated, severely impact our operations. We also do not have a concentration of available sources of labor, services, or licenses or other rights that could, if suddenly eliminated, severely impact our operations. RECLASSIFICATIONS We reclassified certain amounts for previous years to conform with the 1998 presentation. Form 8-K/A AT&T Corp. October 16, 1998 2. DISCONTINUED OPERATIONS On September 20, 1995, AT&T announced a plan, subject to certain conditions, to separate into three independent, publicly held, global companies: communications services (AT&T), communications systems and technologies (Lucent Technologies Inc., "Lucent") and transaction-intensive computing (NCR Corporation, "NCR"). In April 1996 Lucent sold 112 million shares of common stock in an initial public offering (IPO), representing 17.6% of the Lucent common stock outstanding. Because of AT&T's plan to spin off its remaining 82.4% interest in Lucent, the sale of the Lucent stock was recorded as an equity transaction, resulting in an increase in AT&T's additional paid-in capital at the time of the IPO. In addition, in connection with the restructuring, Lucent assumed $3.7 billion of AT&T debt in 1996. On September 30, 1996, AT&T distributed to AT&T shareowners of record as of September 17, 1996, the remaining Lucent common stock held by AT&T. The shares were distributed on the basis of .324084 of a share of Lucent for each AT&T share outstanding. On October 1, 1996, AT&T sold its remaining interest in AT&T Capital for approximately $1.8 billion, resulting in a gain of $162, or $.09 per share, after taxes. On December 31, 1996, AT&T also distributed all of the outstanding common stock of NCR to AT&T shareowners of record as of December 13, 1996. The shares were distributed on the basis of .0625 of a share of NCR for each AT&T share outstanding on the record date. As a result of the Lucent and NCR distributions, AT&T's shareowners' equity was reduced by $2.2 billion. The distributions of the Lucent and NCR common stock to AT&T shareowners were non-cash transactions totaling $4.8 billion which did not affect AT&T's results of operations. On July 1, 1997, AT&T sold its submarine systems business (SSI) to Tyco International Ltd. for approximately $850, resulting in an after-tax gain of $66, or $0.04 per share. Form 8-K/A AT&T Corp. October 16, 1998 On April 2, 1998, AT&T sold AT&T Universal Card Services, Inc. (UCS) for $3,500 to Citibank. The after-tax gain resulting from the disposal of UCS was $1,290,or $0.71 per share in the second quarter. Included in the sale was the signing of a co-branding and joint marketing agreement. In addition, we received $5,722 as settlement of receivables from UCS. The consolidated financial statements of AT&T have been restated to reflect the dispositions of Lucent, NCR, AT&T Capital, SSI, UCS and certain other businesses as discontinued operations. Accordingly, the revenues, costs and expenses, assets and liabilities, and cash flows of these discontinued operations have been excluded from the respective captions in the Consolidated Statements of Income, Consolidated Balance Sheets and Consolidated Statements of Cash Flows, and have been reported through the dates of disposition as "Income(loss) from discontinued operations," net of applicable income taxes; as "Net assets of discontinued operations," and as "Net cash used in discontinued operations" for all periods presented. In 1997 we adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Among other provisions, this standard requires that in connection with the transfer of financial assets, liabilities incurred should be measured at fair value and retained interests should be recorded as a portion of the original carrying amount of the transferred financial assets. This standard applies only to UCS and resulted in a substantial benefit to income from discontinued operations for the year. Summarized financial information for discontinued operations is as follows: 1997 1996 1995 Revenues $1,942 $23,979 $31,164 Income(loss) before income taxes 150 (180) (4,043) Net income(loss) 100 173 (2,896) Current assets 7,734 7,590 Total assets 7,808 7,979 Current liabilities* 5,602 6,190 Total liabilities* 6,707 6,469 Net assets of discontinued operations $1,101 $ 1,510 *Current liabilities include $5,224 and $5,706 of debt maturing within one year and total liabilities include an additional $1,093 and $170 of long-term debt at December 31, 1997, and December 31, 1996, respectively, all of which were payable to AT&T. Form 8-K/A AT&T Corp. October 16, 1998 The income(loss) before income taxes includes allocated interest expense of $45 and $134 in 1996 and 1995, respectively. Interest expense was allocated to discontinued operations based on a ratio of net assets of discontinued operations to total AT&T consolidated assets. No interest expense was allocated to discontinued operations in 1997 due to the immateriality of the amounts; however, UCS recorded direct interest expense of $297, $383 and $626 in 1997, 1996 and 1995, respectively, primarily related to the amounts payable to AT&T. 3. NEW ACCOUNTING PRONOUNCEMENTS Beginning with the 1998 annual report we will adopt SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes the standards for the manner in which public enterprises are required to report financial and descriptive information about their operating segments. This standard defines operating segments as components of an enterprise for which separate financial information is available and evaluated regularly as a means for assessing segment performance and allocating resources to segments. A measure of profit or loss, total assets and other related information are required to be disclosed for each operating segment. In addition, this standard requires the annual disclosure of: information concerning revenues derived from the enterprise's products or services; countries in which it earns revenue or holds assets, and major customers. In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." Among other provisions, it standardizes certain disclosure requirements for pension and other postretirement benefits, requires additional information on changes in the benefit obligations and fair values of plan assets, and eliminates certain other disclosures. The standard is effective for fiscal years beginning after December 15, 1997. For AT&T this means that the standard is effective for the 1998 annual report. Since the standard applies only to the presentation of pension and other postretirement benefit information, it will not have any impact on AT&T's results of operations, financial position or cash flows. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Among other provisions, the SOP requires that entities capitalize certain internal-use software costs once certain criteria are met. The SOP is effective for financial statements for fiscal years beginning after December 15, 1998, though early adoption is encouraged. For AT&T this means that it must be adopted no later than January 1, 1999. If AT&T elects to adopt the SOP earlier than the effective date, restatement of interim periods during the year of adoption is required. Management is currently assessing the impact on AT&T's consolidated financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Among other provisions, it requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains and losses resulting from changes in the fair values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. This standard is effective for fiscal years beginning after June 15, 1999, though earlier adoption is encouraged and retroactive application is prohibited. For AT&T this means that the standard must be adopted no later than January 1, 2000. Management does not expect the adoption of this standard to have a material impact on AT&T's results of operations, financial position or cash flows. 4. LIN BROADCASTING In 1995 we acquired the remaining 48% of LIN Broadcasting Corporation (LIN) for approximately $3.3 billion. The purchase price was allocated to the fair value of assets acquired of $4.0 billion and the fair value of liabilities assumed of $0.7 billion. Form 8-K/A AT&T Corp. October 16, 1998 On March 3, 1998, AT&T sold all of its 45% common share interest in LIN Television Corporation, a subsidiary of LIN, for $742 to Hicks, Muse, Tate and Furst Incorporated. The company recognized a pre-tax gain of $317 in the first quarter of 1998. Also on March 3, 1998, AT&T agreed to sell WOOD-TV, its television station in Grand Rapids, Michigan, for approximately $123, subject to certain adjustments, which is expected to close in the fourth quarter of 1998. 5. SUPPLEMENTARY FINANCIAL INFORMATION SUPPLEMENTARY INCOME STATEMENT INFORMATION For the Years Ended December 31 1997 1996 1995 INCLUDED IN DEPRECIATION AND AMORTIZATION Amortization of licensing costs $163 $170 $133 Amortization of goodwill 62 55 75 INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE Research and development expenses $851 $822 $727 OTHER INCOME-NET Interest income $ 59 $ 49 $ 42 Minority interests in earnings of subsidiaries (12) (12) (16) Net equity earnings from investments 31 48 84 Officers' life insurance 68 74 73 Sale/exchange of cellular investments 75 158 64 Gain on sale of Skynet 97 - - Miscellaneous-net 125 88 23 Total other income-net $443 $405 $270 DEDUCTED FROM INTEREST EXPENSE Capitalized interest $254 $193 $107 Form 8-K/A AT&T Corp. October 16, 1998 SUPPLEMENTARY BALANCE SHEET INFORMATION At December 31 1997 1996 PROPERTY, PLANT AND EQUIPMENT Machinery, electronic and other equipment $ 39,240 $ 34,017 Buildings and improvements 6,810 6,299 Land and improvements 386 373 Total property, plant and equipment 46,436 40,689 Accumulated depreciation (22,233) (19,886) Property, plant and equipment-net $ 24,203 $ 20,803 OTHER ASSETS Unamortized goodwill $ 1,515 $ 1,383 Deferred charges 733 484 Other 582 515 Total other assets $ 2,830 $ 2,382 SUPPLEMENTARY CASH FLOW INFORMATION For the Years Ended December 31 1997 1996 1995 Interest payments net of amounts capitalized $ 250 $ 372 $ 445 Income tax payments 2,416 2,136 2,016 Form 8-K/A AT&T Corp. October 16, 1998 6. BUSINESS RESTRUCTURING AND OTHER CHARGES In the fourth quarter of 1995 we recorded a pre-tax charge of $3,023 to cover restructuring costs of $2,301 and asset impairments and other charges of $722. This charge included plans to exit certain proprietary network and messaging services; restructure customer service organizations; consolidate call servicing centers; exit certain satellite services; reorganize corporate support functions such as information systems, human resources and financial operations, and restructure certain international operations. As part of our plan to sell certain businesses and to restructure our operations, restructuring liabilities of $1,712 were recorded for employee separation costs, costs associated with early termination of building leases and other items. In addition, asset impairments of $567 (which directly reduced the carrying value of the related asset balances) and $22 of benefit plan losses were recorded. The 1995 restructure charge of $2,301 included separation costs for nearly 17,000 employees, which included approximately 12,000 management and 5,000 occupational employees. As of December 31, 1997, approximately 6,800 management employees and 2,300 occupational employees have been separated. Of the 6,800 management separations, approximately 4,300 accepted voluntary severance packages. During 1996 and 1997 we completed the restructuring of our proprietary network and messaging services business, closed several call servicing centers, consolidated customer care centers, sold certain international operations and reorganized certain corporate support functions. The implementation of certain restructuring activities are occurring at a slower pace than planned. There have been delays in exiting certain businesses and reorganizing corporate support functions, in part to ensure customer satisfaction during this transition period. However, certain facility costs have payment terms extending beyond 1998. We believe that the balance is adequate to complete these plans. On January 26, 1998, we announced a plan to reduce headcount by 15,000 to 18,000 over two years as part of the Company's overall cost reduction program. In connection with this plan, a voluntary retirement incentive program (VRIP) was offered to eligible management employees. Approximately 15,300 management employees accepted the VRIP offer. During the second quarter 1998 AT&T recorded restructuring charges of $2,743 ($1,694 after-tax) primarily in connection with the VRIP offer. The restructuring charges of $2,743 will be partially offset by approximately $1.1 billion of gains to be recognized in the third and fourth quarters of 1998 as employees' pension benefit obligations are settled. The amount of gains to be recognized in future periods is subject to market fluctuations. Due to the capital market downturn and the lowering of the discount rate, as of the beginning of October, we estimate that the gains will be $0.7 billion. The following table displays a rollforward of the liabilities for business restructuring from December 31, 1995, to December 31, 1997: Form 8-K/A AT&T Corp. October 16, 1998 1996 -------------------------- Dec. 31, Dec. 31, 1995 Amounts 1996 Type of Cost Balance Additions Utilized Balance Employee separations $ 925 $ - $(319) $ 606 Facility closings 761 - (233) 528 Other 406 - (152) 254 Total $2,092 $ - $(704) $1,388 - --------------------------------------------------------------------------- 1997 -------------------------- Dec. 31, Dec. 31, 1996 Amounts 1997 Type of Cost Balance Additions Utilized Balance Employee separations $ 606 $ - $(193) $413 Facility closings 528 - (94) 434 Other 254 - (194) 60 Total $1,388 $ - $(481) $907 - --------------------------------------------------------------------------- 1997 utilization includes $100 reversal of pre-1995 reserves. 1996 utilization includes $112 of net transfers to Lucent and NCR. The balance at December 31, 1997, includes $180 of pre-1995 charges primarily related to excess space in various leased facilities and is expected to be fully utilized over the remaining terms of the leases. The 1995 charge of $722 for asset impairments and other charges included $668 for writing down certain impaired assets, including the write-down in the value of some unnecessary network facilities, the write-down of non-strategic wireless assets and the reduction in value of some investments. There were no assets to be disposed of or sold included in these write-downs. The charge also included $54 of other items, none of which individually exceed 1% of the total charge. The total pretax charge for continuing operations was $3,023 in 1995. Form 8-K/A AT&T Corp. October 16, 1998 In the third quarter of 1995, a charge of $1,172 (net of taxes) and in the fourth quarter of 1995, a charge of $2,149 (net of taxes) were reflected in the loss from discontinued operations. 7. INCOME TAXES The following table shows the principal reasons for the difference between the effective income tax rate and the United States federal statutory income tax rate: For the Years Ended December 31 1997 1996 1995 U.S. federal statutory income tax rate 35% 35% 35% Federal income tax at statutory rate $2,440 $3,044 $1,724 Amortization of investment tax credits (14) (21) (35) State and local income taxes, net of federal income tax effect 183 273 179 Amortization of intangibles 23 14 62 Foreign rate differential 117 131 (11) Taxes on repatriated and accumulated foreign income, net of tax credits (32) 19 17 Legal entity restructuring - (195) - Research credits (63) (13) (24) Other differences-net 69 (13) 32 Provision for income taxes $2,723 $3,239 $1,944 Effective income tax rate 39.0% 37.2% 39.5% The U.S. and foreign components of income before income taxes and the provision for income taxes are presented in this table: For the Years Ended December 31 1997 1996 1995 INCOME BEFORE INCOME TAXES United States $7,090 $8,900 $5,412 Foreign (118) (203) (487) Total $6,972 $8,697 $4,925 PROVISION FOR INCOME TAXES CURRENT Federal $1,561 $2,290 $1,922 State and local 194 400 385 Foreign 49 25 1 $1,804 $2,715 $2,308 DEFERRED Federal $ 851 $ 511 $ (221) State and local 89 23 (109) Foreign (5) 11 1 $ 935 $ 545 $ (329) Deferred investment tax credits (16) (21) (35) Provision for income taxes $2,723 $3,239 $1,944 Form 8-K/A AT&T Corp. October 16, 1998 Deferred income tax liabilities are taxes we expect to pay in future periods. Similarly, deferred income tax assets are recorded for expected reductions in taxes payable in future periods. Deferred income taxes arise because of differences in the book and tax bases of certain assets and liabilities. Deferred income tax liabilities and assets consist of the following: At December 31 1997 1996 LONG-TERM DEFERRED INCOME TAX LIABILITIES Property, plant and equipment $6,285 $5,350 Investments 320 95 Other 1,185 1,404 Total long-term deferred income tax liabilities $7,790 $6,849 LONG-TERM DEFERRED INCOME TAX ASSETS Business restructuring $ 162 $ 195 Net operating loss/credit carryforwards 487 311 Employee pensions and other benefits-net 1,026 1,298 Reserves and allowances 93 120 Other 658 309 Valuation allowance (347) (211) Total net long-term deferred income tax assets $2,079 $2,022 Net long-term deferred income tax liabilities $5,711 $4,827 CURRENT DEFERRED INCOME TAX LIABILITIES Total current deferred income tax liabilities $ 177 $ 119 CURRENT DEFERRED INCOME TAX ASSETS Business restructuring $ 225 $ 248 Employee pensions and other benefits 315 528 Reserves and allowances 617 587 Other 272 21 Total net current deferred income tax assets $1,429 $1,384 Net current deferred income tax assets $1,252 $1,265 At December 31, 1997, we had net operating loss carryforwards (tax-effected) for federal and state income tax purposes of $220 and $102, respectively, expiring through 2013. We also had foreign net operating loss carryforwards (tax-effected) of $140, of which $130 has no expiration date, with the balance expiring by the year 2002 as well as federal tax credit carryforwards of $30 which are not subject to expiration. We recorded a valuation allowance to reflect the estimated amount of deferred tax assets which, more likely than not, will not be realized. Form 8-K/A AT&T Corp. October 16, 1998 8. POSTRETIREMENT BENEFITS Our benefit plans for retirees include health care benefits, life insurance coverage and telephone concessions. Postretirement contributions to trust funds are determined using the attained-age-normal cost method for health care benefits and the aggregate cost method for life insurance plans. Immediately following the spin-off of Lucent on September 30, 1996, Lucent established separate postretirement benefit plans, and a share of the postretirement benefit obligations and postretirement benefit assets held in trust were transferred from AT&T to Lucent based on methods and assumptions that were agreed to by both companies. Adjustments to the estimated assets and postretirement benefit obligations that were transferred to Lucent were not material in 1997. Subsequent adjustments, if any, are also expected to be immaterial. This table shows the components of the net postretirement benefit cost: For the Years Ended December 31 1997 1996 1995 Service cost-benefits earned during the period $ 56 $ 53 $ 40 Interest cost on accumulated postretirement benefit obligation 278 263 258 Expected return on plan assets* (120) (99) (78) Amortization of unrecognized prior service costs 39 39 23 Amortization of net loss(gain) - 3 (3) Net postretirement benefit cost $ 253 $259 $240 * The actual return on plan assets was $358 in 1997, $313 in 1996 and $256 in 1995. The expected long-term rate of return on plan assets was 9.0% in 1997, 1996 and 1995. Prior service costs are amortized primarily on a straight-line basis over the average remaining service period of active employees. We had approximately 40,400, 37,900 and 34,500 retirees as of December 31, 1997, 1996, and 1995, respectively. Form 8-K/A AT&T Corp. October 16, 1998 Our plan assets consist primarily of listed stocks, corporate and governmental debt, cash and cash equivalents, and life insurance contracts. The following table shows the funded status of our postretirement benefit plans reconciled with the amounts recognized in the Consolidated Balance Sheets: At December 31 1997 1996 Accumulated postretirement benefit obligation: Retirees $2,655 $2,244 Fully eligible active plan participants 651 453 Other active plan participants 1,050 1,042 Total accumulated postretirement benefit obligation 4,356 3,739 Plan assets at fair value 1,969 1,566 Unfunded postretirement obligation 2,387 2,173 Less: Unrecognized prior service costs 166 206 Unrecognized net gain (227) (510) Accrued postretirement benefit obligation $2,448 $2,477 We made these assumptions in valuing our postretirement benefit obligation at December 31: 1997 1996 Weighted-average discount rate 7.0% 7.5% Assumed rate of increase in the per capita cost of covered health care benefits 5.3% 5.6% We assumed that the growth in the per capita cost of covered health care benefits (the health care cost trend rate) would gradually decline after 1997 to 4.8% by the year 2008 and then remain level. This assumption greatly affects the amounts reported. To illustrate, increasing the assumed trend rate by 1% in each year would raise our accumulated postretirement benefit obligation at December 31, 1997, by $218 and our 1997 postretirement benefit costs by $18. 9. EMPLOYEE BENEFIT PLANS PENSION PLANS We sponsor noncontributory defined benefit plans covering the majority of our employees. Benefits for management employees are principally based on career-average pay. Benefits for occupational employees are not directly related to pay. Pension contributions are principally determined using the aggregate cost method and are primarily made to trust funds held for the sole benefit of plan participants. Immediately following the spin-off of Lucent on September 30, 1996, Lucent established separate defined benefit plans, and a share of the pension obligations and pension assets held in trust were transferred from AT&T to Lucent based on methods and assumptions that were agreed to by both companies. Adjustments to the estimated asset and pension obligation amounts that were transferred to Lucent were not material in 1997. Subsequent adjustments, if any, are also expected to be immaterial. Form 8-K/A AT&T Corp. October 16, 1998 We compute pension cost using the projected unit credit method and assumed a long-term rate of return on plan assets of 9.0% in 1997, 1996 and 1995. Pension cost includes the following components: For the Years Ended December 31 1997 1996 1995 Service cost-benefits earned during the period $ 305 $ 295 $ 200 Interest cost on projected benefit obligation 946 861 747 Amortization of unrecognized prior service costs 114 99 90 Credit for expected return on plan assets* (1,371) (1,195) (1,043) Amortization of transition asset (181) (183) (193) Charges for special pension benefits 5 - 58 Net pension credit $ (182) $ (123) $ (141) *The actual return on plan assets was $3,464 in 1997, $2,981 in 1996 and $1,044 in 1995. The net pension credit in 1995 includes a one-time charge of $58 for early retirement options and curtailments. This table shows the funded status of the defined benefit plans: At December 31 1997 1996 Actuarial present value of accumulated benefit obligation, including vested benefits of $13,123 and $10,083 $14,150 $11,520 Plan assets at fair value $20,513 $17,680 Less: Actuarial present value of projected benefit obligation 14,481 12,380 Excess of assets over projected benefit obligation 6,032 5,300 Unrecognized prior service costs 904 766 Unrecognized transition asset (708) (889) Unrecognized net gain (4,130) (3,303) Net minimum liability of nonqualified plans (103) (51) Prepaid pension costs $ 1,995 $ 1,823 Form 8-K/A AT&T Corp. October 16, 1998 We used these rates and assumptions to calculate the projected benefit obligation: At December 31 1997 1996 Weighted-average discount rate 7.0% 7.5% Rate of increase in future compensation levels 4.5% 5.0% The prepaid pension costs shown above are net of pension liabilities for plans where accumulated plan benefits exceed assets. Such liabilities, that are not material, are included in other liabilities in the Consolidated Balance Sheets. We are amortizing over 15.9 years the unrecognized transition asset related to our 1986 adoption of SFAS No. 87, "Employers' Accounting for Pensions." We amortize prior service costs primarily on a straight-line basis over the average remaining service period of active employees. Our plan assets consist primarily of listed stocks (including $75 and $56 of AT&T common stock at December 31, 1997, and 1996, respectively), corporate and governmental debt, real estate investments and cash and cash equivalents. SAVINGS PLANS We sponsor savings plans for the majority of our employees. The plans allow employees to contribute a portion of their pretax and/or after-tax income in accordance with specified guidelines. We match a percentage of the employee contributions up to certain limits. Our contributions amounted to $201 in 1997, $181 in 1996 and $158 in 1995. Form 8-K/A AT&T Corp. October 16, 1998 10. STOCK-BASED COMPENSATION PLANS Under the 1997 Long-Term Incentive Program, which was effective June 1, 1997, we grant stock options, performance shares, restricted stock and other awards. There are 100 million shares of common stock available for grant with a maximum of 15 million common shares that may be used for awards other than stock options. The exercise price of any stock option is equal to the stock price when the option is granted. Generally, the options vest over three years and are exercisable up to ten years from the date of grant. Under the 1987 Long-Term Incentive Program, which expired in April 1997, we granted the same awards, and on January 1 of each year 0.6% of the outstanding shares of our common stock became available for grant. Under the 1997 Long-Term Incentive Program, performance share units are awarded to key employees in the form of either common stock or cash at the end of a three-year period based on AT&T's total shareholder return as measured against a peer group of industry competitors. Under the 1987 Long- Term Incentive Program, performance share units with the same terms were also awarded to key employees based on AT&T's return-to-equity performance compared with a target. Form 8-K/A AT&T Corp. October 16, 1998 On August 1, 1997, substantially all of our employees were granted a stock option award to purchase 100 shares representing a total of 12.5 million shares of our common stock. The options vest after three years and are exercisable up to ten years from the grant date. Under the AT&T 1996 Employee Stock Purchase Plan (Plan), which was effective July 1, 1996, we are authorized to issue up to 50 million shares of common stock to our eligible employees. Under the terms of the Plan, employees may have up to 10% of their earnings withheld to purchase AT&T's common stock. The purchase price of the stock on the date of exercise is 85% of the average high and low sale prices of shares on the New York Stock Exchange for that day. Under the Plan, we sold approximately 4 million shares to employees in 1997 and 3 million in 1996. We apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for our plans. Accordingly, no compensation expense has been recognized for our stock-based compensation plans other than for our performance-based and restricted stock awards, SARs, and prior to July 1, 1996, for the stock purchase plan for former McCaw Cellular Communications, Inc. employees. Compensation costs charged against income were $110 and $46 in 1997 and 1996, respectively. A summary of option transactions is shown below: Weighted- Weighted- Average Average Exercise Exercise Shares in Thousands 1997 Price 1996 Price 1995 Outstanding at January 1 50,977 $32.39 50,082 $41.68 42,638 Lucent and NCR spin-off adjustments - - 22,678 - - Options granted 38,310 $38.97 11,021 $41.27 13,545 Options and SARs exercised (11,101) $24.51 (10,760) $19.10 (8,207) Average exercise price $29.32 Options assumed in purchase of LIN - - - - 3,382 Options canceled or forfeited: Lucent and NCR spin-offs - - (16,179) $37.25 - Other employee plans (4,205) $40.09 (5,865) $36.50 (1,276) At December 31: Options outstanding 73,981 $37.15 50,977 $32.39 50,082 Average exercise price $41.68 Options exercisable 22,981 $33.26 28,034 $28.81 28,775 Shares available for grant 90,345 - 25,856 - 20,182 Form 8-K/A AT&T Corp. October 16, 1998 Effective on the dates of spin-off of Lucent and NCR, AT&T stock options held by Lucent and NCR employees were canceled. For the holders of unexercised AT&T stock options, the number of options was adjusted and all exercise prices were decreased immediately following each spin-off date to preserve the economic values of the options that existed prior to those dates. During 1997 402,057 SARs were exercised and no SARs were granted. At December 31, 1997, 346,781 SARs remained unexercised, all of which were exercisable. AT&T has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." If AT&T had elected to recognize compensation costs based on the fair value at the date of grant for awards in 1997, 1996 and 1995, consistent with the provisions of SFAS No. 123, AT&T's net income and earnings per common share would have been reduced to the following pro forma amounts: For the Years Ended December 31 1997 1996 1995 Income from continuing operations $4,158 $ 5,385 $ 2,968 Income(loss) from discontinued operations 99 146 (2,902) Gain on sale of discontinued operations 66 162 - Net income $4,323 $5,693 $ 66 Earnings per common share-basic: Continuing operations $ 2.34 $ 3.06 $ 1.71 Discontinued operations 0.05 0.08 (1.67) Gain on sale of discontinued operations 0.04 0.09 - Net income $ 2.43 $ 3.23 $ 0.04 Earnings per common share-diluted: Continuing operations $ 2.33 $ 3.05 $ 1.70 Discontinued operations 0.05 0.08 (1.66) Gain on sale of discontinued operations 0.04 0.09 - Net income $ 2.42 $ 3.22 $ 0.04 Without the effect of pro forma costs related to the conversion of options in the Lucent and NCR spin-offs, pro forma income from continuing operations was $5,415, or $3.06 per diluted common share in 1996. The pro forma effect on net income for 1997, 1996 and 1995 may not be representative of the pro forma effect on net income of future years because the SFAS No. 123 method of accounting for pro forma compensation expense has not been applied to options granted prior to January 1, 1995. The weighted-average fair values at date of grant for options granted during 1997, 1996 and 1995 were $9.09, $13.12 and $14.02, respectively, and were estimated using the Black-Scholes option-pricing model. The risk-free interest rates applied for 1997, 1996 and 1995 were 6.16%, 6.11% and 6.44%, respectively. The following assumptions were applied for periods before the Lucent spin-off, subsequent to the Lucent spin-off through December 31, 1996, and for 1997, respectively: (i) expected dividend yields of 2.4%, 2.8% and 2.2%, (ii) expected volatility rates of 19.0%, 21.0% and 21.8%, and (iii) expected lives of 5.0, 4.5 and 4.5 years. Form 8-K/A AT&T Corp. October 16, 1998 The following table summarizes information about stock options outstanding at December 31, 1997: Options Outstanding Options Exercisable Weighted- Number Average Weighted- Number Weighted- Range of Outstanding at Remaining Average Exercisable at Average Exercise Dec. 31, 1997 Contractual Exercise Dec. 31, 1997 Exercise Prices (in thousands) Life Price (in thousands) Price $ 1.11 - $15.76 2,298 5.4 $ 9.78 318 $13.64 15.83 - 27.12 8,396 4.0 23.69 6,611 24.40 27.16 - 34.95 7,890 6.4 34.16 5,088 24.50 35.20 - 36.74 6,207 5.7 35.61 4,495 35.54 36.75 12,501 9.4 36.75 - 36.75 36.76 - 39.30 4,229 6.0 37.41 3,304 37.20 39.31 17,810 9.0 39.31 22 39.31 39.32 - 47.37 11,813 7.6 45.15 3,143 45.19 48.28 - 60.00 2,837 7.5 52.83 - - 73,981 7.5 $37.15 22,981 $33.26 11. DEBT OBLIGATIONS DEBT MATURING WITHIN ONE YEAR At December 31 1997 1996 Commercial paper $3,113 $1,950 Currently maturing long-term debt 961 487 Other 11 36 Total debt maturing within one year $4,085 $2,473 Weighted-average interest rate of short-term debt 5.8% 5.5% A consortium of lenders provides revolving credit facilities of approximately $5.5 billion to AT&T. These credit facilities are intended for general corporate purposes, which include support for AT&T's commercial paper, and were substantially unused at December 31, 1997. Form 8-K/A AT&T Corp. October 16, 1998 LONG-TERM OBLIGATIONS At December 31 1997 1996 Interest Rates (a) Maturities DEBENTURES 4 3/8% to 4 3/4% 1998-1999 $ 500 $ 500 5 1/8% to 6% 2000-2001 500 500 8 1/8% to 8 5/8% 2002-2031 1,996 1,996 NOTES 5 9/38% to 7 3/4% 1998-2025 4,000 4,368 8% to 8 17/20% 1998-2025 579 786 9 3/5% to 12 7/8% 1998-2007 1,065 1,020 Variable rate 1998-2054 67 115 Total debentures and notes 8,707 9,285 Other 189 170 Less: Unamortized discount-net 78 90 Total long-term obligations 8,818 9,365 Less: Currently maturing long-term debt 961 487 Net long-term obligations $7,857 $8,878 (a) Note that the actual interest paid on our debt obligations may have differed from the stated amount due to our entering into interest rate swap contracts to manage our exposure to interest rate risk and our strategy to reduce finance costs. This table shows the maturities at December 31, 1997, of the $8,818 in total long-term obligations: 1998 1999 2000 2001 2002 Later Years $961 $1,073 $662 $658 $505 $4,959 12. FINANCIAL INSTRUMENTS In the normal course of business we use various financial instruments, including derivative financial instruments, for purposes other than trading. We do not use derivative financial instruments for speculative purposes. These instruments include letters of credit, guarantees of debt, interest rate swap agreements and foreign currency exchange contracts. Interest rate swap agreements and foreign currency exchange contracts are used to mitigate interest rate and foreign currency exposures. Collateral is generally not required for these types of instruments. By their nature all such instruments involve risk, including the credit risk of nonperformance by counterparties, and our maximum potential loss may exceed the amount recognized in our balance sheet. However, at December 31, 1997, and 1996, in management's opinion there was no significant risk of loss in the event Form 8-K/A AT&T Corp. October 16, 1998 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. Form 8-K/A AT&T Corp. October 16, 1998 FOREIGN EXCHANGE We enter into foreign currency exchange contracts, including forward and option contracts, to manage our exposure to changes in currency exchange rates, principally French francs, Deutsche marks, British pounds sterling and Japanese yen. The use of these derivative financial instruments allows us to reduce our exposure to the risk of adverse changes in exchange rates on the eventual reimbursement to foreign telephone companies for their portion of the revenues billed by AT&T for calls placed in the U.S. to a foreign country and other foreign currency payables and receivables. These transactions are generally expected to occur in less than one year. FAIR VALUES OF FINANCIAL INSTRUMENTS INCLUDING DERIVATIVE FINANCIAL INSTRUMENTS The following table summarizes the notional amounts of material financial instruments. The notional amounts represent agreed-upon amounts on which calculations of dollars to be exchanged are based. They do not represent amounts exchanged by the parties and, therefore, are not a measure of our exposure. Our exposure is limited to the fair value of the contracts with a positive fair value plus interest receivable, if any, at the reporting date. DERIVATIVES AND OFF BALANCE SHEET INSTRUMENTS 1997 1996 Contract/ Contract/ Notional Notional Amount Amount Interest rate swap agreements $671 $983 Foreign exchange: Forward contracts 426 646 Option contracts 2 65 Letters of credit 63 264 Guarantees of debt 242 328 The tables below show the valuation methods and the carrying amounts and estimated fair values of material financial instruments. FINANCIAL INSTRUMENT VALUATION METHOD Debt excluding capital leases Market quotes or based on rates available to us for debt with similar terms and maturities Letters of credit Fees paid to obtain the obligations Guarantees of debt There are no quoted market prices for similar agreements available Interest rate swap agreements Market quotes obtained from dealers Foreign exchange contracts Market quotes Form 8-K/A AT&T Corp. October 16, 1998 For debt excluding capital leases, the carrying amounts and fair values were $11,875 and $12,312, respectively, for 1997; and $11,279 and $11,709, respectively, for 1996. DERIVATIVES AND OFF BALANCE SHEET INSTRUMENTS 1997 Carrying Fair Amount Value Asset Liab. Asset Liab. Interest rate swap agreements $3 $10 $5 $31 Foreign exchange forward contracts - 21 3 33 1996 Carrying Fair Amount Value Asset Liab. Asset Liab. Interest rate swap agreements $5 $ 8 $47 $12 Foreign exchange forward contracts 6 15 7 35 13. COMMITMENTS AND CONTINGENCIES In the normal course of business we are subject to proceedings, lawsuits and other claims, including proceedings under laws and regulations related to environmental and other matters. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at December 31, 1997. These matters could affect the operating results of any one quarter when resolved in future periods. However, we believe that after final disposition any monetary liability or financial impact to us beyond that provided for at year-end would not be material to our annual consolidated financial statements. We lease land, buildings and equipment through contracts that expire in various years through 2032. Our rental expense under operating leases was $853 in 1997, $736 in 1996 and $665 in 1995. The following table shows our future minimum lease payments due under noncancelable operating leases at December 31, 1997. Such payments total $3,600. The total of minimum rentals to be received in the future under noncancelable subleases as of December 31, 1997, was $275. 1998 1999 2000 2001 2002 Later Years $686 $560 $474 $362 $275 $1,243 Form 8-K/A AT&T Corp. October 16, 1998 14. QUARTERLY INFORMATION (UNAUDITED) 1997 First Second Third Fourth Revenues $12,688 $12,896 $13,090 $12,903 Operating income 1,616 1,482 1,747 1,991 Income from continuing operations 1,043 877 1,078 1,251 Income from discontinued operations 38 31 20 11 Gain on sale of discontinued operation - - 66 - Net income 1,081 908 1,164 1,262 Income per common share-basic: Continuing operations .59 .49 .60 .70 Discontinued operations .02 .02 .01 .01 Gain on sale of discontinued operation - - .04 - Net income .61 .51 .65 .71 Income per common share-diluted: Continuing operations .59 .49 .60 .69 Discontinued operations .02 .02 .01 .01 Gain on sale of discontinued operation - - .04 - Net income .61 .51 .65 .70 Dividends declared .33 .33 .33 .33 Stock price*: High $41 7/8 $38 1/4 $45 15/16 $63 15/16 Low 34 3/8 30 3/4 34 1/4 43 3/16 Quarter-end close 34 7/8 35 1/16 44 1/4 61 5/16 * Stock prices obtained from the Composite Tape Form 8-K/A AT&T Corp. October 16, 1998 1996 First Second Third Fourth Revenues $12,411 $12,455 $12,895 $12,927 Operating income 2,363 2,268 2,189 1,889 Income from continuing Operations 1,420 1,490 1,346 1,202 Income(loss) from discontinued Operations (77) (18) 52 216 Gain on sale of discontinued operation - - - 162 Net income 1,343 1,472 1,398 1,580 Income(loss) per common share-basic: Continuing operations .81 .85 .76 .68 Discontinued operations (.04) (.01) .03 .12 Gain on sale of discontinued operation - - - .09 Net income .77 .84 .79 .89 Income(loss) per common share-diluted: Continuing operations .81 .84 .76 .68 Discontinued operations (.04) (.01) .03 .12 Gain on sale of discontinued operation - - - .09 Net income .77 .83 .79 .89 Dividends declared .33 .33 .33 .33 Stock price*: High $68 7/8 $64 7/8 $62 3/8 $44 1/2 Low 60 1/8 58 49 1/4 33 1/4 Quarter-end close 61 1/8 62 52 1/4 43 3/8 * Stock prices obtained from the Composite Tape Stock prices on or before September 30, 1996, have not been restated to reflect the Lucent spin-off. Stock prices on or before December 31, 1996, have not been restated to reflect the NCR spin-off. Form 8-K/A AT&T Corp. October 16, 1998 15. TELEPORT COMMUNICATIONS GROUP INC. MERGER On July 23, 1998, AT&T completed the merger with Teleport Communications Group Inc. (TCG), pursuant to the plan of merger dated January 8, 1998. Each share of TCG common stock was exchanged for 0.943 of AT&T common stock resulting in an issuance of 181.6 million shares in the transaction. The merger is being accounted for as a pooling of interests, and accordingly, AT&T's results of operations, financial position and cash flows have been restated to reflect the merger. In August 1998, AT&T extinguished approximately $1 billion of debt. The early extinguishment of this debt resulted in a pre-tax charge to AT&T of $217 million ($137 million after-tax) and was recorded as an extraordinary loss. 16. SUBSEQUENT EVENTS (UNAUDITED) TELE-COMMUNICATIONS, INC. ACQUISITION On June 24, 1998, AT&T signed a definitive merger agreement with Tele-Communications, Inc. (TCI) for an all-stock transaction. Under the agreement, AT&T will issue 0.7757 shares of AT&T common stock for each share of TCI Group Series A common stock and 0.8533 shares of AT&T common stock for each share of TCI Group Series B stock. The transaction, which is subject to regulatory, shareowner and other approvals, is expected to be completed in the first half of 1999. Also announced was TCI's intention to combine Liberty Media Group, its programming arm, and TCI Ventures Group, its technology investments unit, to form the new Liberty Media Group. Upon closing of the AT&T/TCI merger, the shareowners of the new Liberty Media Group will be issued separate tracking stock by AT&T in exchange for the shares currently held in Liberty Media Group and TCI Ventures Group. JOINT VENTURE WITH BRITISH TELECOMMUNICATIONS PLC (BT) AT&T and BT announced on July 26, 1998 that they will create a global venture to serve the complete communications needs of multinational companies and the international calling needs of individuals and businesses around the world. The venture, which will be owned equally by AT&T and BT, will combine trans-border assets and operations of each company, including their existing international networks, all of their international traffic, all of their trans-border products for business customers -- including an expanding set of Concert services -- and AT&T and BT's multinational accounts in selected industry sectors. The formation of the venture is subject to certain conditions, including receipt of regulatory approvals and the purchase by BT of MCI Communication Corporation's interest in Concert and the final negotiation and execution of definitive documents. The transaction is expected to be completed within 12 months. EX-12 2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Form 8-K/A October 16, 1998 Exhibit 12 AT&T Corp. Computation of Ratio of Earnings to Fixed Charges (Dollars in Millions) (Unaudited) Six Months Ended June 30, For the years ended December 31, 1998 1997 1996 1995 1994 1993 Income from continuing operations before income taxes $ 1,637 $6,972 $8,694 $4,924 $6,989 $6,187 Less interest capitalized during the period 110 254 193 107 39 61 Add equity investment losses, net of distributions of less than 50% owned affiliates 124 144 155 205 91 59 Add fixed charges 454 846 855 730 777 1,014 Total Earnings from Continuing operations before income taxes and fixed charges $2,105 $7,708 $9,511 $ 5,752 $7,818 $7,199 Fixed Charges: Total interest expense including capitalized interest $ 318 $ 562 $ 610 $ 508 $ 540 $ 763 Interest portion of rental expense 136 284 245 222 237 251 Total fixed charges $ 454 $ 846 $ 855 $ 730 $ 777 $1,014 Ratio of earnings to fixed charges 4.6 9.1 11.1 7.9 10.1 7.1 EX-23 3 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of AT&T Corp. ("AT&T" or the "Company") on Form S-3 for the Shareowner Dividend Reinvestment and Stock Purchase Plan (Registration No. 333-00573), Form S-8 for the AT&T Long Term Savings and Security Plan (Registration Nos. 333-47257 and 33-34265), Form S-8 for the AT&T Long Term Savings Plan for Management Employees (Registration Nos. 33-34264, 33-29256 and 33-21937), Form S-8 for the AT&T Retirement Savings and Profit Sharing Plan (Registration No. 33-39708), Form S-8 for Shares Issuable Under the Stock Option Plan of the AT&T 1987 Long Term Incentive Program (Registration Nos. 333-47251 and 33-56643), Form S-8 for the AT&T of Puerto Rico, Inc. Long Term Savings Plan for Management Employees (Registration No. 33-50819), Form S-8 for the AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan (Registration No. 33-50817), and Post-Effective Amendment No. 1 on Form S-8 to Form S-8 Registration Statement (Registration No. 33-54797) for the AT&T 1996 Employee Stock Purchase Plan, Form S-8 for the AT&T Shares for Growth Program (Registration No. 333-47255), Form S-8 for the AT&T 1997 Long Term Incentive Program (Registration No. 33-28665), Form S-3 for the AT&T $2,600,000,000 Notes and Warrants to Purchase Notes (Registration No. 33-49589), Form S-3 for the AT&T $3,000,000,000 Notes and Warrants to Purchase Notes (Registration No. 33-59495), Form S-4 for the AT&T 5,000,000 Common Shares (Registration No. 33-57745), and in Post-Effective Amendment Nos. 1, 2 and 3 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-42150) for the NCR Corporation 1989 Stock Compensation Plan (Registration No. 33-42150-01), the NCR Corporation 1984 Stock Option Plan (Registration No. 33-42150-02) and the NCR Corporation 1976 Stock Option Plan (Registration No. 33-42150-03), respectively, and the Post-Effective Amendment Nos. 1, 2, 3 and 5 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-52119) for the McCaw Cellular Communications, Inc. 1983 Non-Qualified Stock Option Plan (Registration No. 33-52119-01), the McCaw Cellular Communications, Inc. 1987 Stock Option Plan (Registration No. 33-52119-02), the McCaw Cellular Communications, Inc. Equity Purchase Plan (Registration No. 33-52119-03) and the McCaw Cellular Communications, Inc. Employee Stock Purchase Plan (Registration No. 33-52119-05), respectively, and Post-Effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-45302) for the Teradata Corporation 1987 Incentive and Other Stock Option Plan (Registration No. 33-45302-01), Form S-8 for the AT&T Amended and Restated 1969 Stock Option Plan for LIN Broadcasting Corp. (Registration No. 33-63195), and in Post Effective Amendment Nos. 1, 2, 3, 4 and 5 on Form S-8 to Form S-4 Registration Statement (Registration No. 333-49419) for the Teleport Communications Group Inc. 1993 Stock Option Plan (Registration No. 333-49419-01), Teleport Communications Group Inc. 1996 Equity Incentive Plan (Registration No. 333-49419-02), ACC Corp. Employee Long Term Incentive Plan (Registration No. 333-49419-03), ACC Corp. Non-Employee Directors' Stock Option Plan (Registration No. 333-49419-04) and ACC Corp. 1996 UK Sharesave Scheme (Registration No. 333-49419-05), and Form S-8 for AT&T Wireless Services, Inc. Employee Stock Purchase Plan (Registration No. 333-52757) of our report dated January 26, 1998 (September 23, 1998 as to Note 15), on our audits of the consolidated financial statements of the Company and its subsidiaries at December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996 and 1995, which report is included in this Current Report on Form 8-K/A. PRICEWATERHOUSECOOPERS LLP 1301 Avenue of the Americas New York, New York January 7, 1999 EX-27 4 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the unaudited consolidated balance sheet of AT&T Corp. at June 30, 1998 and the unaudited consolidated statement of income for the six-month period ended June 30, 1998 and is qualified in its entirety by reference to such financial statements. 1,000,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 7,845 123 9,894 1,044 0 19,179 48,059 23,815 60,973 14,725 7,161 0 0 1,806 23,861 60,973 0 26,042 0 25,210 0 714 208 1,637 582 1,055 1,300 0 0 2,355 1.31 1.30
EX-27 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated unaudited balance sheet of AT&T Corp. at March 31, 1998 and the unaudited consolidated statement of income for the three-month period ended March 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 328 245 9,667 1,020 0 16,215 46,663 23,084 59,417 15,844 7,342 0 0 1,789 22,474 59,417 0 12,831 0 11,477 0 357 80 1,980 726 1,254 10 0 0 1,264 0.71 0.70
EX-27 6 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheet of AT&T Corp. at December 31, 1997 and the consolidated statement of income for the twelve-month period ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 1,000,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 318 307 9,663 988 0 16,777 46,436 22,233 61,095 17,317 7,857 0 0 1,789 21,889 61,095 0 51,577 0 44,741 0 1,522 307 6,972 2,723 4,249 166 0 0 4,415 2.48 2.47
EX-27 7 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the unaudited consolidated balance sheet of AT&T Corp. at September 30, 1997 and the unaudited consolidated statement of income for the nine-month period ended September 30, 1997 and is qualified in its entirety by reference to such financial statements. 1,000,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 368 150 10,033 1,056 0 16,071 44,091 21,758 58,568 16,205 8,149 0 0 1,781 20,955 58,568 0 38,674 0 33,829 0 1,185 241 4,975 1,977 2,998 155 0 0 3,153 1.77 1.77
EX-27 8 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the unaudited consolidated balance sheet of AT&T Corp. at June 30, 1997 and the unaudited consolidated statement of income for the six-month period ended June 30, 1997 and is qualified in its entirety by reference to such financial statements. 1,000,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 129 362 9,687 994 0 15,625 42,269 21,054 57,106 15,303 8,296 0 0 1,781 20,332 57,106 0 25,584 0 22,486 0 812 166 3,171 1,251 1,920 69 0 0 1,989 1.12 1.12
EX-27 9 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the unaudited consolidated balance sheet of AT&T Corp. at March 31, 1997 and the unaudited consolidated statement of income for the three-month period ended March 31, 1997 and is qualified in its entirety by reference to such financial statements. 1,000,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 354 411 9,768 1,006 0 16,380 40,897 20,417 56,593 14,664 8,931 0 0 1,780 19,932 56,593 0 12,688 0 11,072 0 431 81 1,711 668 1,043 38 0 0 1,081 0.61 0.61
EX-27 10 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheet of AT&T Corp. at December 31, 1996 and the consolidated statement of income for the twelve-month period ended December 31, 1996 and is qualified in its entirety by reference to such financial statements. 1,000,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 196 441 9,972 948 0 17,775 40,689 19,886 57,348 16,313 8,878 0 0 1,774 19,318 57,348 0 50,688 0 41,979 0 1,518 417 8,697 3,239 5,458 335 0 0 5,793 3.29 3.28
EX-27 11 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the unaudited consolidated balance sheet of AT&T Corp. at December 31, 1995 and the consolidated statement of income for the twelve-month period ended December 31, 1995 and is qualified in its entirety by reference to such financial statements. 1,000,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 87 0 9,198 798 0 20,584 34,119 17,666 62,864 24,544 8,913 0 0 1,746 15,654 62,864 0 48,449 0 43,280 0 1,125 514 4,925 1,944 2,981 (2,896) 0 0 85 0.05 0.05
EX-99 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION For the six months ended June 30, 1998 OVERVIEW On July 23, 1998, AT&T completed the merger with Teleport Communications Group Inc. (TCG), the largest competitive local exchange carrier. Each share of TCG common stock was exchanged for 0.943 of AT&T common stock resulting in an issuance of 181.6 million shares in the transaction. The merger was accounted for as a pooling of interests, and accordingly, AT&T's historical financial statements have been restated to reflect the combined results of AT&T and TCG. Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" (APB 30) the consolidated financial statements of AT&T Corp. ("AT&T" or the "Company") reflect the dispositions of AT&T's submarine systems business (SSI), which was sold to Tyco International Ltd. on July 1, 1997, and the sale of Universal Card Services, Inc. (UCS) which was sold to Citibank on April 2, 1998, as discontinued operations. Accordingly, the revenues, costs and expenses, assets and liabilities, and cash flows of SSI and UCS have been excluded from the respective captions in the Consolidated Statements of Income, Consolidated Balance Sheets and Consolidated Statements of Cash Flows, and have been reported through their respective dates of disposition as "Income from discontinued operations", net of applicable income taxes; as "Net assets of discontinued operations"; and as "Net cash provided by discontinued operations." The discussion and analysis of AT&T's results of operations is discussed for consolidated AT&T, as well as by business segment: business services, consumer services, wireless services, and other and corporate. Supplemental information is also included for local services, new wireless services businesses, AT&T Solutions, WorldNet and other on-line services, and international operations and ventures. Earnings before interest and taxes (EBIT), total assets and other related information is discussed for the consolidated results of AT&T and by business segment. AT&T defines EBIT as operating income plus other income and is a measure used by our chief operating decision makers to measure AT&T's consolidated operating results before interest and taxes and to measure segment profitability. Interest and taxes are not allocated to our segments because debt is managed and serviced and taxes are managed and calculated at the consolidated level. Trends in interest and taxes are discussed separately on a consolidated basis. Management believes EBIT is a meaningful measure to disclose to investors because it provides investors with an analysis within MD&A of operating results using the same measures used by the chief operating decision makers of AT&T, provides a return on total capitalization measure and it allows investors a means to evaluate the financial results of each segment to consolidated AT&T. EBIT may or may not be consistent with the calculation of EBIT for other public companies and EBIT should not be viewed by investors as an alternative to GAAP measures of income as a measure of performance or to cash flows from operating, investing and financing activities as a measure of liquidity. EBITDA is also used by management as a measure of segment performance and is defined as EBIT plus depreciation and amortization. We believe it is meaningful to investors as a measure of each segment's liquidity and allows investors to evaluate segments liquidity using the same measure as is used by the chief operating decision makers of AT&T. Consolidated EBITDA is also provided for comparison purposes. EBITDA may or may not be consistent with the calculation of EBITDA for other public companies and should not be viewed by investors as an alternative to GAAP measures of income as a measure of performance or to cash flows from operating, investing and financing activities as a measure of liquidity. In addition, EBITDA does not take into effect changes in certain assets and liabilities which can effect cash flow. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Six months ended June 30, Change $ in millions 1998 1997 $ % Total revenues.............................$26,042 $25,584 $ 458 1.8% OTHER INCOME STATEMENT ITEMS* Operating income......................... 832 3,098 (2,266) (73.1)% Operating margin......................... 3.2% 12.1% Income from continuing operations......... 1,055 1,920 (865) (45.1)% Diluted earnings per share, continuing operations...................$ 0.58 $ 1.08 $ (0.50) (46.3)% OTHER DATA* EBIT...................................... 1,845 3,337 (1,492) (44.7)% EBITDA.................................... 4,068 5,279 (1,211) (22.9)% CASH FLOW: Provided by operating activities..........$ 3,913 $2,780 $ 1,133 40.8% Provided by(used in) investing activities. 8,547 (1,939) 10,486 540.8% Used in financing activities.............. (5,025) (919) (4,106) (446.8)% Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION * Operating income for the first six months of 1998 included $3,344 million of restructuring and other charges, with an after-tax diluted earnings per share reduction of approximately $1.14 per share. EBIT for the six months ended June 30, 1998 also included pre-tax gains on the sales of LIN Television Corporation (LIN-TV) of $317 million, AT&T Solutions Customer Care of $350 million and AT&T's investment in SmarTone Telecommunications Holdings Limited (SmarTone) of $103 million. After taxes, these gains totaled approximately $0.27 per diluted share. Operating income for the six months ended June 30, 1997 contained a $160 million charge, or a reduction of approximately $0.05 per share, for exiting the two-way messaging business and a $100 million benefit, or approximately $0.03 per share, from the reversal of pre-1995 restructuring charges. In addition, EBIT also included a $97 million pre-tax gain, or approximately $0.03 per share after-tax, on the sale of AT&T Skynet Satellite Services (Skynet). Revenues from continuing operations increased $458 million, or 1.8%, for the six months ended June 30, 1998 compared to the same period in 1997. Long-distance services revenues decreased 0.9% compared to the first six months of 1997, while calling volumes increased 4.8%. Operating income decreased $2,266 million, or 73.1%, to $832 million for the six months ended June 30, 1998 compared to the same period in 1997. For the six months ended June 30, 1998, operating margin declined 890 basis points compared to the first six months of 1997. In the first six months of 1998 EBIT decreased $1,492 million, or 44.7%, to $1,845 million from $3,337 million in the first six months of 1997. For the first six months of 1998, excluding the impact of the 1998 charges and the 1997 charge and reserve reversal noted above, operating income increased $1,018 million, or 32.2%, to $4,176 million and operating margin improved 370 basis points. Excluding the gains, charges and reserve reversal, EBIT increased $1,119 million, or 33.9%, to $4,419 million from $3,300 million in the first six months of 1997. These increases were primarily due to the Company's cost reduction efforts partially offset by higher depreciation and amortization expenses which reflect our continued investments in the AT&T networks. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION For the six months ended June 30, 1998, earnings per share was $0.58, a decrease of $0.50, or 46.3%, compared to earnings per share of $1.08 for the same period in 1997. Excluding the gains, charges and reserve reversal, earnings per share was approximately $1.45, an increase of approximately $0.38, or 35.5%, compared to 1997. RESULTS OF OPERATIONS Six months ended June 30, Change $ in millions 1998 1997 $ % REVENUES Business services..........................$11,373 $10,984 $ 389 3.5% Consumer services.......................... 11,283 11,801 (518) (4.4)% Wireless services.......................... 2,477 2,271 206 9.1% Other and corporate........................ 1,549 1,199 350 29.1% Eliminations............................... (640) (671) 31 4.6% Total revenues.............................$26,042 $25,584 $ 458 1.8% Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION REVENUES For the first six months of 1998, revenues from continuing operations increased $458 million, or 1.8%, compared to the same period in 1997. Increases in business services, other and corporate and wireless services revenues were partially offset by a decline in consumer services revenue. Long-distance services revenues declined 0.9% for the six months ended June 30, 1998 compared to the same period in 1997 as calling volumes increased 4.8%. OPERATING EXPENSES Access and other interconnection expenses for the six months ended June 30, 1998 decreased $683 million, or 8.0%, compared to the same period in 1997. The decline relates primarily to lower international settlement rates, a reduction in access charges due to a reduction in per minute access expenses and AT&T's continuing efforts to manage these costs. Reductions in per-minute access expenses were partially offset by Primary Interexchange Carrier Charges (PICC), AT&T's contribution to the Universal Service Fund (USF) and volume increases. Access and other interconnection expenses as a percentage of long-distance services revenues were 34.7% for the first half of 1998 and 37.4% for the first half of 1997. Network and other communications services expenses increased $141 million, or 3.1%, for the first six months of 1998 compared to the same period of 1997. Increased costs related primarily to increased data traffic on the AT&T network, higher expenditures for wireless handsets, costs associated with the expansion of the local communications network and the first quarter 1997 reversal of the non-recurring pre-1995 restructuring charge. These increases were partially offset by a lower provision for uncollectibles and $80 million of the two-way messaging charge recorded in the first quarter of 1997. For the six month period ended June 30, 1998, depreciation and amortization expenses increased $286 million, or 15.0%, from the same period in 1997. Excluding the $80 million impact of the two-way messaging charges in the first quarter of 1997, depreciation expense increased $366 million, or 20.0%, for the six months ended June 30, 1998, compared to the same period in 1997. These increases were primarily due to continued high levels of capital expenditures. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION For the six months ended June 30, 1998, selling, general and administrative (SG&A) expenses decreased $364 million, or 4.9%, compared to the same period in 1997. The reduced level of expenses reflects AT&T's efforts to achieve a best-in-class cost structure, including the removal of $1.6 billion in SG&A expenses from the business in 1998 (excluding Teleport Communications Group, Inc. (TCG)) and a 22% ratio of SG&A expenses to revenues by the end of 1999. Excluding SG&A expenses for TCG, SG&A expenses for the six months ended June 30, 1998 decreased $435 million, or 5.9%, compared to the six months ended June 30, 1997. The decrease was due primarily to a decline in costs associated with marketing and sales in consumer services, as a result of better targeting and efficiency gains in customer acquisition efforts, and lower marketing and sales in business services, achieved largely through consolidation of functions and reductions of support staff headcount. These declines were partially offset by increased expenses for new wireless services businesses due to the activation of new markets since June 1997, higher costs associated with the year 2000 initiatives and higher local costs primarily resulting from TCG's expanded business. For the six months ended June 30, 1998, SG&A expenses as a percentage of total revenues decreased to 27.2% compared to 29.1% for the first six months of 1997. In order to achieve a $1.6 billion reduction in SG&A expenses for 1998, AT&T must reduce SG&A expenses at a greater rate in the second half of 1998 versus the first half. Much of this expense reduction will be achieved as a result of headcount reductions associated with the VRIP. AT&T has established processes for evaluating and managing the risks and costs associated with preparing our systems and applications for the year 2000. The Company expects to incur internal staff costs as well as consulting and other expenses related to the conversion and testing of our systems and applications. We incurred $96 million in expenses for the year 2000 in the six month period ended June 30, 1998. We expect the cost of this project to be approximately $300 million in 1998. More than half of these costs represent internal information technology resources that have been redeployed from other projects and are expected to return to these projects upon completion. We plan on having substantially all modifications completed by the end of 1998, leaving a full year for testing. We are still assessing the impact to us, if any, in 1999. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Restructuring and other charges for the six months ended June 30, 1998 totaled $3,344 million. This is comprised of second quarter charges of $2,743 million plus a $601 million pre-tax charge recorded in the first quarter of 1998. During the second quarter of 1998 AT&T recorded restructuring charges of $2,743 million primarily in connection with a plan, announced on January 26, 1998, to reduce headcount by 15,000 to 18,000 over two years as part of the Company's overall cost reduction program. In connection with this plan, a voluntary retirement incentive program (VRIP) was offered to eligible management employees. Approximately 15,300 management employees accepted the VRIP offer. The restructuring charges of $2,743 million include a pre-tax charge of $2,724 million, comprised of $2,412 million for pension special termination benefits and other costs and $312 million for postretirement special termination benefits and curtailment losses. This amount will be partially offset by approximately $1.1 billion of gains to be recognized in the third and fourth quarters of this year as employees' pension benefit obligations are settled. The amount of gains to be recognized in future periods is subject to market fluctuations. Due to the capital market downturn and the lowering of the discount rate, as of the beginning of October, we estimate that the gains will be $0.7 billion. The restructuring charges of $2,743 million also include pre-tax charges of $125 million for facility costs and $150 million for executive separation costs. The second quarter charges were partially offset by the reversal of $256 million (pre-tax) of 1995 business restructuring reserves primarily resulting from the overlap of VRIP on certain 1995 projects. The $601 million first quarter charge related to the Company's decision not to pursue Total Service Resale (TSR) as a local service strategy. The pre-tax charge includes a $543 million write-down of software, $42 million primarily related to equipment associated with the software platform and $16 million for the termination of certain contracts. The Company's in-market experiences and results have proven that the TSR solution is not economically viable for the short-term or the long-term. AT&T continues its financial and operational review of the various alternatives for entering the local market, including the impacts associated with the merger with TCG and the pending merger with Tele-Communications, Inc. (TCI). In addition, certain fixed assets which were purchased as part of the TSR initiative may also be impaired. These assets are currently being evaluated in conjunction with the TCG merger to determine if any assets are impaired. Management expects to complete this review by the end of the fourth quarter. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OTHER INCOME STATEMENT ITEMS For the six months ended June 30, 1998, other income-net increased $774 million, or 323.9%, to $1,013 million compared with the same period in 1997. This increase is mainly due to pre-tax gains associated with the strategy of exiting non-strategic businesses. In 1998, we recorded gains on the sales of AT&T Solutions Customer Care of $350 million, LIN-TV of $317 million and SmarTone of $103 million as well as an increase in interest income on temporary cash investments. These increases were partially offset by the $97 million pre-tax gain on the sale of Skynet in 1997. Interest expense increased $42 million, or 24.9%, for the six months ended June 30, 1998 compared to the same period in 1997. These increases were mainly due to the reclassification of interest expense from discontinued operations to continuing operations resulting from AT&T not retiring all of the UCS related debt upon the sale of UCS. The provision for income taxes for the six months ended June 30, 1998 decreased $669 million, or 53.4%, compared with the same period in 1997. Excluding the impact of the first and second quarter restructuring and other charges, the provision for income taxes for the six months ended June 30, 1998 increased $610 million, or 48.9%, compared with the same period in 1997. The increase is primarily due to an increase in income before income taxes partially offset by a lower effective tax rate. The adjusted effective tax rate for the six months ended June 30, 1998 was 37.4% a decrease of 200 basis points from the six months ended June 30, 1997. The decrease in the effective tax rate was principally due to the tax impacts of certain investment dispositions and foreign legal entity restructurings. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Income from discontinued operations decreased $59 million for the six month period ended June 30, 1998, compared to the same period of 1997. In 1998 the results of discontinued operations included the results of UCS. In 1997 the results of discontinued operations included the results of both UCS and SSI, which was sold on July 1, 1997. On April 2, 1998, AT&T sold UCS for $3,500 million, resulting in an after-tax gain on sale of discontinued operation of $1,290 million or $.71 per share. SEGMENT RESULTS AT&T's results are segmented according to the Company's primary lines of business: business services, consumer services, and wireless services. A fourth segment, identified as other and corporate, includes the results of AT&T Solutions, international operations and ventures, on-line services such as AT&T WorldNet Internet access, and various other items. The results of these four segments plus the impact of the elimination of internal business sum to AT&T's total results. The following is a discussion of each of these segments, as well as supplemental information on local services, new wireless services businesses, AT&T Solutions, WorldNet and other on-line services, and international operations and ventures. AT&T defines EBIT as operating income plus other income and is a measure used by our chief operating decision makers to measure AT&T's consolidated operating results before interest and taxes and to measure segment profitability. Interest and taxes are not allocated to our segments because debt is managed and serviced and taxes are managed and calculated at the consolidated level. Trends in interest and taxes are discussed separately on a consolidated basis. Management believes EBIT is a meaningful measure to disclose to investors because it provides investors with an analysis within MD&A of operating results using the same measures used by the chief operating decision makers of AT&T, provides a return on total capitalization measure and it allows investors a means to evaluate the financial results of each segment to consolidated AT&T. EBIT may or may not be consistent with the calculation of EBIT for other public companies and EBIT should not be viewed by investors as an alternative to GAAP measures of income as a measure of performance or to cash flows from operating, investing and financing activities as a measure of liquidity. EBITDA is also used by management as a measure of segment performance and is defined as EBIT plus depreciation and amortization. We believe it is meaningful to investors as a measure of each segment's liquidity and allows investors to evaluate segments liquidity using the same measure as is used by the chief operating decision makers of AT&T. Consolidated EBITDA is also provided for comparison purposes. EBITDA may or may not be consistent with the calculation of EBITDA for other public companies and should not be viewed by investors as an alternative to GAAP measures of income as a measure of performance or to cash flows from operating, investing and financing activities as a measure of liquidity. In addition, EBITDA does not take into effect changes in certain assets and liabilities which can effect cash flow. Total assets for each segment include all assets, except interentity receivables. Deferred taxes, prepaid pension assets, and corporate-owned or leased real estate are held at the corporate level and therefore are included in the other and corporate segment. Shared network assets are allocated to the segments based on the prior three years' volumes and are reallocated each January. BUSINESS SERVICES Business services results reflect sales of long-distance services (domestic and international, inbound and outbound, inter- and intraLATA toll services, calling card and operator-handled services, data services, messaging and other network enabled services), local services and web hosting and other electronic commerce services. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Six months ended June 30, Change $ in millions 1998 1997 $ % Revenue..............................$11,373 $ 10,984 $389 3.5% EBIT................................. 2,379 2,244 135 6.0% EBITDA............................... 3,409 3,071 338 11.0% OTHER ITEMS Capital additions....................$ 1,717 $ 1,304 $413 31.5% At June 30, At Dec. 31, Change 1998 1997 $ % Total assets*........................$15,933 $ 15,030 $903 6.0% * Includes allocated shared network assets of $10,816 and $10,246 at June 30, 1998 and December 31, 1997, respectively. REVENUE Business service revenue grew to $11,373 million in the six months ended June 30, 1998, compared to the six months ended June 30, 1997. This is an increase of $389 million, or 3.5%, compared to the first six months of 1997. Adjusted for the sales of Tridom and Skynet, revenues grew 4.1% in the six months ended June 30, 1998, compared to the same period in 1997. Data services led the growth in business services revenue with double-digit increases for the six month period ended June 30, 1998, compared to the same period in 1997, though growth was tempered by an outage in AT&T's frame relay network in April 1998. AT&T did not bill customers for service during the outage and for a period of time until the cause and solution of the problem were identified. Though essentially immaterial to AT&T's overall earnings, the interruption reduced business services' revenue growth. Based on favorable customer response to AT&T's handling of the situation, this impact is expected to be confined to the second quarter. For the six months ended June 30, 1998, long-distance services revenue increased 3.3% compared to the same period in 1997. For the six months ended June 30, 1998, long-distance calling volume increased at a low-double-digit rate compared to the same period in 1997. The volume increase was led by growth in inbound calling. Volume growth continues to be pressured by lower usage of calling cards and operator-handled services, which are increasingly being replaced by wireless service. Voice-related revenue for the six months ended June 30, 1998, was essentially flat compared to the same periods last year, as AT&T continues to experience declines in average revenue per minute. Price declines have occurred due primarily to competitive forces; however, other factors such as migration from switched to nodal services and growth in lower-priced intraLATA minutes have also contributed to the decline in average price. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION EBIT/EBITDA EBIT increased 6.0% to $2,379 million for the six months ended June 30, 1998, from $2,244 million in the same period in 1997. EBITDA increased 11.0% to $3,409 million for the first six months of 1998 from $3,071 million for the six months ended June 30, 1997. Excluding the first quarter 1997 gain on the sale of Skynet, EBIT increased 10.8% to $2,379 million from $2,147 million and EBITDA increased 14.6% to $3,409 million from $2,974 million. The increases were driven by progress toward AT&T's company-wide cost reduction goals. In particular, streamlining of customer care and sales support functions, including significant headcount reductions contributed to the increases. Higher levels of depreciation accounted for the slower rate of EBIT growth as compared EBITDA. OTHER ITEMS For the six months ended June 30, 1998, capital additions increased $413 million, or 31.5%, compared to the same period in 1997. Capital additions for the first six months of 1998 include investment in AT&T's SONET program, the AT&T Digital Link product for local service and data networks. Total assets increased $903 million, or 6.0%, to $15,933 million at June 30, 1998, from $15,030 million at December 31, 1997. The increase was primarily due to 1998 capital expenditures and the reallocation of shared network assets, partially offset by current year depreciation. CONSUMER SERVICES Consumer services results reflect sales of long-distance services (including domestic and international, inter- and intraLATA toll services, calling card and operator handled calling, and prepaid calling cards) and local service to residential customers. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Six months ended June 30, Change $ in millions 1998 1997 $ % Revenue.............................$11,283 $11,801 $ (518) (4.4)% EBIT................................ 2,892 2,242 650 29.0% EBITDA.............................. 3,236 2,608 628 24.0% OTHER ITEMS Capital additions...................$ 140 $ 319 $ (179) (56.2)% At June 30, At Dec. 31, Change 1998 1997 $ % Total assets*.......................$ 6,867 $ 7,923 $(1,056) (13.3)% * Includes allocated shared network assets of $3,100 and $4,168 at June 30, 1998 and December 31, 1997, respectively. REVENUE For the six months ended June 30, 1998, revenues decreased $518 million, or 4.4%, on a low-single-digit decline in calling volumes. The decline in revenue for the six months ended June 30, 1998, resulted in part from access cost reductions implemented in July 1997, which we have passed along to customers through lower basic rates and migration to more favorable calling plans. The controlled migration of customers to more favorable calling plans concurrent with reductions in the Company's cost structure is a key part of AT&T's strategy to retain profitable customers. As a result of this strategy, AT&T now has over 23 million customers on its One Rate plans, including more than 10 million on One Rate Plus. More than 75% of AT&T's consumer long-distance minutes were generated by customers on optional calling plans. Also, the Company's emphasis on high-value customers results in fewer customer acquisitions. While this approach continues to restrain revenue and volume growth, it is key to AT&T's strategy of optimizing its customer base for profitable future growth. Competition in domestic and international long-distance markets, including the impact of dial around, contributed to the lower revenue and volume growth rates for the six months ended June 30, 1998, as did substitution of wireless services for calling card and other higher-priced long-distance services. Reductions in international long-distance pricing consistent with falling international settlement rates also contributed to the decrease in revenue. AT&T's progress in intraLATA toll markets for the six months ended June 30, 1998 continues to offset part of the decline in revenue and volume. AT&T now competes in 42 states for presubscribed local toll service, has claimed double-digit market share in each state, and now has 11 million total subscribed intraLATA customers. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION EBIT/EBITDA For the first six months of 1998, EBIT increased 29.0% to $2,892 million and EBITDA increased $628 million, or 24.0%, to $3,236 million. These increases were driven primarily by reduced marketing and sales expenses. AT&T's focus on high-value customers has led to lower, yet more productive customer acquisition and retention spending. Simplification and consolidation of marketing messages has also generated substantial efficiencies, and consumer services has increased its use of alternate, more efficient distribution channels. To date, AT&T has received over 52 thousand on-line orders for various consumer services. For example, One Rate On-line offers activation, customer care and billing over the Internet with payment via credit card. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION WIRELESS SERVICES Wireless services results include sales of wireless services and products to customers in 850 MHz cellular markets and 1.9 GHz markets. Also included are the results of the messaging, aviation communications, and wireless data divisions, as well as the costs associated with the development of fixed wireless technology. The impact of the new 1.9 GHz markets, wireless data, two-way messaging and fixed wireless development are discussed as "new wireless services businesses"; all other wireless results are reflected as "core" businesses. TOTAL WIRELESS SERVICES Six months ended June 30, Change $ in millions 1998 1997 $ % Revenue..............................$ 2,477 $ 2,271 $ 206 9.1% EBIT................................. 182 128 54 41.9% EBITDA............................... 711 623 88 14.1% OTHER ITEMS Capital additions....................$ 413 $ 1,123 $(710) (63.2)% At June 30, At Dec. 31, Change 1998 1997 $ % Total assets.........................$18,026 $18,540 $(514) (2.8)% REVENUE Wireless services revenue grew $206 million, or 9.1%, in the first six months ended June 30, 1998, compared to the same period of 1997. The increase was driven by the overwhelming response to AT&T's Digital One Rate offer coupled with our ongoing focus on high-value customers. Digital One Rate is a key element of our ongoing efforts to acquire and retain profitable, high-value customers. This strategy has had a significant positive impact on average revenue per user (ARPU), slowing its decline. Migration of customers to digital service is another key element of AT&T's wireless strategy. Digital service generates lower network costs and improves customer retention. As of June 30, 1998, 45% of AT&T's 6.484 million consolidated subscribers used digital service, up from 21% at June 30, 1997. Including partnership markets, the Company had over 3.4 million digital subscribers at the end of the second quarter of 1998. Total cellular customers served by companies in which AT&T has or shares a controlling interest increased 15.4% to 8.750 million at June 30, 1998, from 7.584 million at June 30, 1997. At June 30, 1998, there were 1.345 million Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION messaging subscribers compared to 1.231 million, or a 9.3% increase, compared to a year ago. EBIT/EBITDA EBIT was $182 million for the first six months of 1998, an increase of $54 million, or 41.9%, from $128 million for the first six months of 1997. Excluding the second quarter 1998 gain on the sale of SmarTone, EBIT was $79 million, a decrease of $209 million, or 72.5%, from $288 million in 1997 excluding the first quarter 1997 charge to exit the two-way messaging business. The decrease was due primarily to higher losses for new wireless services businesses in the current year compared to the prior year period. EBIT for new wireless services businesses was negative $315 million for first six months of 1998, compared to negative $259 million for the first six months of 1997. Excluding the first quarter 1997 charge to exit the two-way messaging business, EBIT for new wireless services businesses decreased $216 million. The decline was due primarily to the roll-out of additional markets. Core EBIT was $497 million for the first six months of 1998, compared to $387 million for the same period last year. Excluding the second quarter SmarTone gain, core EBIT was $394 million for the first six months of 1998. This represents an improvement of $7 million from the same period in 1997. EBITDA was $711 million in the first six months of 1998, an increase of $88 million, or 14.1%, from $623 million for the first six months of 1997. Excluding the second quarter SmarTone gain, EBITDA was $608 million, a decrease of $95 million compared to 1997 excluding the first quarter charge. EBITDA for new wireless services businesses was negative $226 million for the first six months of 1998, compared to negative $163 million for the first six months of 1997. Excluding the first quarter 1997 charge to exit the two-way messaging business, EBITDA for new wireless services businesses decreased $143 million. The decline was due primarily to the roll-out of additional markets. Core EBITDA was $937 million for the first six months of 1998, compared to $786 million for the same period last year. Excluding the second quarter SmarTone gain, core EBITDA was $834 million for the first six months of 1998. This represents an improvement of $48 million from the same period in 1997. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OTHER ITEMS Capital additions decreased $710 million to $413 million for the six month period ended June 30, 1998, compared with $1,123 million for the same period in 1997. These decreases were primarily due to the completion of the majority of AT&T's 1.9 GHz market buildouts. Capital spending for the year-to-date period ended June 30, 1998 was directed primarily at expanding coverage in new and traditional markets. NEW WIRELESS SERVICES BUSINESSES Six months ended June 30, Change $ in millions 1998 1997 $ % Revenue..............................$ 93 $ 5 $ 88 NMF EBIT................................. (315) (259) (56) (21.6)% EBITDA............................... (226) (163) (63) (38.2)% OTHER ITEMS Capital additions....................$ 199 $ 783 $(584) (74.5)% At June 30, At Dec. 31, Change 1998 1997 $ % Total assets.........................$4,399 $4,417 $ (18) (0.4)% Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION CORE WIRELESS SERVICES Six months ended June 30, Change $ in millions 1998 1997 $ % Revenue..............................$ 2,384 $ 2,266 $ 118 5.2% EBIT................................. 497 387 110 28.4% EBITDA............................... 937 786 151 19.1% OTHER ITEMS Capital additions....................$ 214 $ 340 $ (126) (37.3)% At June 30, At Dec. 31, Change 1998 1997 $ % Total assets.........................$13,627 $14,123 $ (496) (3.8)% Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OTHER AND CORPORATE Other and corporate includes TCG, AT&T Solutions, international operations and ventures, on-line services such as AT&T WorldNet, other businesses, and corporate operations. Six months ended June 30, Change $ in millions 1998 1997 $ % Revenue................................$ 1,549 $ 1,199 $ 350 29.1% EBIT................................... (3,597) (1,275) (2,322) (182.0)% EBITDA................................. (3,277) (1,021) (2,256) (220.6)% OTHER ITEMS Capital additions......................$ 639 $ 709 $ (70) (9.7)% At June 30, At Dec. 31, Change 1998 1997 $ % Total assets...........................$ 20,147 $18,501 $ 1,646 8.9% REVENUE For the six months ended June 30, 1998, other and corporate revenue increased $350 million, or 29.1%, compared to the same period of 1997. The revenue growth in the first half of 1998 compared to the same period in 1997 was primarily due to increases in TCG, AT&T Solutions, AT&T WorldNet and international operations and ventures, partially offset by a decrease in revenue from AT&T Solutions Customer Care. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION EBIT/EBITDA EBIT and EBITDA declined by $2,322 million, or 182.0%, and $2,256 million, or 220.6%, respectively in the first six months of 1998 compared to the six months ended June 30, 1997. Excluding the impact of the 1998 restructuring and other charges, the 1998 gains on the sales of LIN-TV and AT&T Solutions Customer Care as well as the first quarter 1997 reversal of pre-1995 restructuring reserves, EBIT and EBITDA improved by $455 million, or 33.1%, and $521 million, or 46.4%, respectively. The improvements for the six months ended June 30, 1998, compared to the same period in 1997, were primarily due to an improvement at international operations, increased interest income on temporary cash investments, improvements at both AT&T Solutions and AT&T WorldNet, and reductions in corporate overhead. ELIMINATIONS Eliminations reflects the elimination of revenue and profit generated by the sale of services between business segments. The sale of business long-distance services to other AT&T units generates nearly all of the eliminated revenue. Revenue eliminations for the six months ended June 30, 1998 were negative $640 million. EBIT and EBITDA were both negative $11 million for the six months ended June 30, 1998. SUPPLEMENTAL DISCLOSURES LOCAL SERVICES Local services for business and residential customers are included as part of AT&T's business services, consumer services, and other and corporate segments. Other and corporate includes TCG's local business and the costs associated with corporate staff dedicated to AT&T's local services effort. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Six months ended June 30, Change $ in millions 1998 1997 $ % Revenue..............................$ 435 $ 225 $ 210 93.3% EBIT................................. (1,034) (404) (630) (155.7)% EBITDA............................... (878) (312) (566) (181.2)% OTHER ITEMS Capital additions....................$ 636 $ 445 $ 191 42.9% At June 30, At Dec. 31, Change 1998 1997 $ % Total assets.........................$ 3,770 $4,068 $(298) (7.3)% REVENUE For the first six months of 1998, revenue increased to $435 million, up from $225 million in the same period of last year. The increase was primarily due to revenue growth for switched services. The increased revenue was also a result of increased market penetration, primarily in existing markets, as well as expansion into new markets. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION EBIT/EBITDA EBIT was negative $1,034 million for the six months ended June 30, 1998. This is a decrease of 155.7% from negative $404 million for the same period of 1997. Excluding the impact of the 1998 asset impairment charge, EBIT decreased $29 million to $433 million in the first six months of 1998 compared to the same period last year. This decline is mainly due to an increase in depreciation and amortization expenses primarily as a result of the expansion of local communications networks and increased investment in AT&T Digital Link. EBITDA declined 181.2% to negative $878 million for the six months ended June 30, 1998 from negative $312 million for the same period of 1997. Excluding the impact of the 1998 asset impairment charge, EBITDA improved 11.1% to negative $277 million in the first six months of 1998 compared to the same period last year. This improvement was primarily due to increased efficiency associated with the network and the company's decision not to pursue the sale of local on a TSR basis. OTHER ITEMS Capital additions were $636 million for the six month period ended June 30, 1998, compared to $445 million in the same period last year. Capital spending for local services was primarily related to TCG's expansion, development and construction of its networks, the acquisition and deployment of switches and the expansion of operating support systems. Total assets were $3,770 million at June 30, 1998, a decrease of $298 million, or 7.3%, compared to $4,068 million at December 31, 1997. The decrease is due primarily to the first quarter write-down of software. NEW WIRELESS SERVICES BUSINESSES Information related to AT&T's new wireless services businesses is included in the wireless services' segment discussion. AT&T SOLUTIONS AT&T Solutions is comprised of AT&T's outsourcing, network integration and multi-media call center businesses. (The results of AT&T Solutions are included in other and corporate.) Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Six months ended June 30, Change $ in millions 1998 1997 $ % Revenue..............................$ 459 $ 342 $ 117 34.0% EBIT................................. (13) (103) 90 87.4% EBITDA............................... 56 (29) 85 289.1% OTHER ITEMS Capital additions....................$ 50 $ 37 $ 13 35.4% At June 30, At Dec. 31, Change 1998 1997 $ % Total assets.........................$ 549 $ 576 $ (27) (4.7)% REVENUE For the six months ended June 30, 1998, revenue grew 34.0% to $459 million. Revenue growth is due primarily to the outsourcing business. The unit currently has more than $3 billion under contract with such clients as United Healthcare, Textron, J.P. Morgan, Merrill Lynch, and MasterCard International. AT&T Solutions manages AT&T's internal network infrastructure, an operation which, while not included in the unit's revenue, provides information technology services and generated internal billings of $780 million for the first six months of 1998. EBIT/EBITDA For the six months ended June 30, 1998, EBIT was a negative $13 million. This is an improvement of 87.4% from negative $103 million for the same period in 1997. For the six months ended June 30, 1998, EBITDA was $56 million. This is an increase of 289.1% from negative $29 million for the same period of 1997. The increases in both EBIT and EBITDA are due to revenue growth and improvements in cost structure. AT&T Solutions remains on target to turn profitable by the end of 1998. OTHER ITEMS Total assets were $549 million at June 30, 1998, compared to $576 million at December 31, 1997. Approximately 50% of total assets in the first six months of 1998 were related to servicing the internal network infrastructure of AT&T. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION WORLDNET AND OTHER ON-LINE SERVICES WorldNet and other on-line services includes AT&T WorldNet Internet access service for residential and business consumers (included in other and corporate) as well as web site hosting and other electronic commerce services (included in business services). Six months ended June 30, Change $ in millions 1998 1997 $ % Revenue..............................$ 162 $ 91 $ 71 77.8% EBIT................................. (224) (311) 87 27.9% EBITDA............................... (199) (297) 98 33.2% OTHER ITEMS Capital additions....................$ 19 $ 27 $ (8) (29.9)% At June 30, At Dec. 31, Change 1998 1997 $ % Total assets.........................$ 359 $ 334 $ 25 7.4% REVENUE For the six months ended June 30, 1998, revenue was $162 million. This is an increase of 77.8% compared to the $91 million in revenue for the six months ended June 30, 1997. The increase was due primarily to continued growth in AT&T WorldNet's residential subscriber base and the expiration of AT&T WorldNet's free-pricing promotion that was offered in 1997. WorldNet subscribers were 1.095 million at June 30, 1998, up from .923 million at June 30, 1997. This is an increase of 18.6% compared to the prior year. Average revenue per customer continues to increase due to the expiration of AT&T WorldNet's initial promotional price programs in favor of regular monthly rates of $9.95 and $19.95. AT&T Web Site Services has approximately 9 thousand hosted sites at the end of the second quarter of 1998 compared with approximately 4 thousand at the end of the second quarter of 1997. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION AT&T continues to explore new ways of growing its internet access business, primarily through AT&T WorldNet and other on-line businesses. In the first quarter of this year AT&T announced a long-distance offer targeting internet access customers. Also, beginning in the first quarter, AT&T WorldNet customers were able to sign up for long-distance services via AT&T's web site and receive a rate of nine cents per minute. The second quarter was highlighted by AT&T's cross-marketing agreements with top Internet search engines Lycos, Excite, Yahoo! and Infoseek. Visitors to each of these sites can now make on-line purchases of AT&T services. These sites will also offer AT&T's new IP-communications applications such as anonymous voice chat and click-to-dial directories. The first of these services, AT&T Chat-n-Talk and AT&T Click-2-Dialsm, were introduced in June. AT&T also announced an agreement with Checkfree that will enable AT&T customers to view and pay their communications bills on the Internet. EBIT/EBITDA EBIT was negative $224 million for the six months ended June 30, 1998, an improvement of 27.9% from negative $311 million in the same period of 1997. EBITDA improved 33.2% to negative $199 million for the six months ended June 30, 1998 from negative $297 million for the same period in 1997. The improvements in both EBIT and EBITDA were primarily due to revenue growth and cost efficiencies in AT&T WorldNet. INTERNATIONAL OPERATIONS AND VENTURES International operations and ventures includes AT&T's consolidated foreign operations, the Company's transit and reorigination businesses, on-line services in the Asia/Pacific region, as well as the equity earnings/losses of AT&T's non-consolidated joint ventures. International operations and ventures does not include bilateral international long-distance traffic. (The results of international operations and ventures are included in other and corporate.) Six months ended June 30, Change $ in millions 1998 1997 $ % Revenue..............................$ 380 $ 316 $ 64 20.4% EBIT................................. (121) (261) 140 53.6% EBITDA............................... (88) (228) 140 61.6% OTHER ITEMS Capital additions....................$ 49 $ 308 $(259) (84.2)% Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION At June 30, At Dec. 31, Change 1998 1997 $ % Total assets.........................$1,536 $1,837 $(301) (16.4)% REVENUE Revenue for the six months ended June 30, 1998 increased 20.4% to $380 million compared to $316 million for the same period last year. This increase was driven by growth in AT&T Communications Services UK and reorigination, partially offset by declines in certain non-strategic businesses, some of which were exited since the second quarter of 1997. For the six month period ended June 30, 1998, revenue from continuing strategic international operations grew 60.5% compared to the same period in 1997. EBIT/EBITDA For the six months ended June 30, 1998, EBIT was negative $121 million, an improvement of 53.6% from negative $261 million in the same period in 1997. EBITDA improved 61.6% to negative $88 million for the first six months of 1998 compared to negative $228 million in the first six months of 1997. The improvements were primarily due to increased revenue, the continued exiting of non-strategic businesses and decreased equity losses on unconsolidated operations. Management is currently assessing the impact, of the announcement regarding the joint venture to be formed with British Telecommunications PLC (BT), on international operations and ventures. OTHER ITEMS Total assets were $1,536 million at June 30, 1998, compared to $1,837 million at December 31, 1997. The decrease is due primarily to a decrease in cash. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FINANCIAL CONDITION JUNE 30, 1998 VERSUS DECEMBER 31, 1997 June 30, December 31, Change $ in millions 1998 1997 $ % Total assets.........................$60,973 $61,095 $ (122) (0.2)% Total assets-continuing operations...$60,973 $59,994 $ 979 1.6% Total assets decreased $122 million, or 0.2%, primarily due to our efforts to divest non-strategic assets partially offset by increases in our local communications network. These efforts generated declines in other and long-term receivables, net assets from discontinued operations, and investments, offset by increases in cash and other assets. The decrease in other and long-term receivables is due primarily to repayment of loans by UCS as part of the settlement for our April 2, 1998 sale to Citicorp. The decrease in net assets from discontinued operations also reflects the sale of UCS. The decline in investments is primarily due to the sales of LIN-TV and SmarTone. The increase in cash is mainly due to cash received from Citibank in the second quarter 1998 related to the sale of UCS. The increase in other assets is primarily due to goodwill associated with our purchase of ACC Corp. (ACC). In addition, decreases in property, plant and equipment due to the local asset impairment charge and the sale of AT&T Solutions Customer Care were offset by increases in our local communications network. Total liabilities decreased $2,111 million, or 5.6%, primarily due to declines in debt, deferred income taxes, payroll and benefit liabilities, and accounts payable, partially offset by increases in long-term benefit-related liabilities and other current liabilities. The decreases in both short-term and long-term debt reflect the paydown of debt with the proceeds from the sales of UCS, LIN-TV and AT&T Solutions Customer Care. The decrease in deferred income taxes primarily reflects the impact of the restructuring and other charges. The decline in payroll and benefit related liabilities primarily reflects annual first quarter payout of employee bonuses and the reversal of a portion of the 1995 business restructuring reserve. The decline in accounts payable is primarily due to a decrease in payables associated with our high year-end capital expenditures. The increase in long-term benefit-related liabilities is primarily due to the second quarter charges associated with the voluntary retirement incentive program for management employees. The charge for pension special termination benefits and other costs resulted in the establishment of a liability for the Management Pension Plan. The increase in other current liabilities is mainly due to an increase in accrued income taxes primarily associated with the sale of UCS. Total shareowners' equity increased $1,989 million, or 8.4%, primarily due to current year's net income and shares issued to acquire ACC partially offset by dividends declared. The ratio of total debt to total capital, (defined as debt divided by total capital) at June 30, 1998, was 24.5% compared to 33.5% at December 31, 1997. The decrease was primarily the result of lower debt. If AT&T used its available cash to retire the outstanding debt, there would $491 million debt remaining at June 30, 1998. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION In the normal course of business, AT&T uses certain derivative financial instruments, mainly interest rate swaps and foreign currency exchange rate contracts. The interest rate swaps and foreign currency contracts and options allow the Company to manage its exposures to changing interest rates and currency exchange rates. AT&T does not use derivative financial instruments for speculative purposes. Credit policies are designed to limit the risks of dealing with other parties to these instruments. In management's view, the risks to AT&T from using these derivative financial instruments are small and the benefits include more stable earnings in periods when interest rates and currency exchange rates are changing. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION LIQUIDITY Six months ended June 30, $ in millions 1998 1997 CASH FLOW: Provided by operating activities $3,913 $2,780 Provided by(used in) investing activities 8,547 (1,939) Used in financing activities (5,025) (919) EBITDA* ................................... $4,068 $5,279 EBITDA, adjusted for gains, charges and reserve reversal**................... 6,642 5,162 * Earnings before interest, taxes, depreciation and amortization **EBITDA for the first six months of 1998 included $3,344 million of restructuring and other charges, pre-tax gains on the sales of LIN Television Corporation (LIN-TV) of $317 million, AT&T Solutions Customer Care of $350 million and AT&T's investment in SmarTone Telecommunications Holdings Limited (SmarTone) of $103 million. EBITDA for the six months ended June 30, 1997 contained an $80 million charge for exiting the two-way messaging business and a $100 million benefit from the reversal of pre-1995 restructuring charges. In addition, EBITDA also included a $97 million pre-tax gain on the sale of AT&T Skynet Satellite Services (Skynet). Cash flows provided by operating activities of continuing operations for the six months ended June 30, 1998, were $3,913 million. This represents an increase of $1,133 million compared to the first six months of 1997. The increase in operating cash flow was driven primarily by a $1,077 million increase in income from continuing operations excluding the restructuring and other charges and the gains on sales which have essentially no impact on operating cash flows. For the six months ended June 30, 1998, cash provided by investing activities of $8,547 million increased $10,486 million from a $1,939 million use of cash for the six months ended June 30, 1997 due primarily to the UCS sale on April 2, 1998, for which we received $5,722 million in settlement of receivables as well as $3,500 million in proceeds from the sale. Additionally, in 1998 we received $742 million, $625 million and $183 million from the sales of LIN-TV, AT&T Solutions Customer Care and SmarTone, respectively. Net cash used in financing activities of $5,025 million increased $4,106 million from $919 million for the first six months of 1997. This primarily reflects the use of cash received from 1998 asset dispositions to paydown commercial paper. In July 1998, AT&T's Board of Directors authorized an open market share repurchase program to repurchase up to $3 billion of AT&T common stock. We began repurchasing shares in the third quarter of 1998 and intend to reissue the repurchased shares as part of the shares to be issued in connection with the TCI merger. In August 1998, AT&T extinguished approximately $1 billion of debt. This early extinguishment of debt resulted in an after-tax charge of $137 million and was recorded as an extraordinary loss. 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. Excluding the restructuring and other charges and gains in 1998 and the 1997 reversal and charge, EBITDA increased 28.7% to $6,642 million for the first six months of 1998 from $5,162 million for the first six months of 1997. The increase was due primarily to our cost reduction efforts. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RECENT PRONOUNCEMENTS Beginning with the 1998 annual report we will adopt Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes the standards for the manner in which public enterprises are required to report financial and descriptive information about their operating segments. The standard defines operating segments as components of an enterprise for which separate financial information is available and evaluated regularly as a means for assessing segment performance and allocating resources to segments. A measure of profit or loss, total assets and other related information are required to be disclosed for each operating segment. In addition, this standard requires the annual disclosure of: information concerning revenues derived from the enterprise's products or services; countries in which it earns revenues or holds assets, and major customers. In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." Among other provisions, it standardizes certain disclosure requirements for pension and other postretirement benefits, requires additional information on changes in the benefit obligations and fair values of plan assets, and eliminates certain other disclosures. The standard is effective for fiscal years beginning after December 15, 1997. For AT&T this means that the standard is effective for the 1998 annual report. Since the standard applies only to the presentation of pension and other postretirement benefit information, it will not have any impact on AT&T's results of operations, financial position or cash flows. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Among other provisions, the SOP requires that entities capitalize certain internal-use software costs once certain criteria are met. The SOP is effective for financial statements for fiscal years beginning after December 15, 1998, though early adoption is encouraged. For AT&T this means that it must be adopted no later than January 1, 1999. If AT&T elects to adopt the SOP earlier than the effective date, restatement of interim periods during the year of adoption is required. Management is currently assessing the impact on AT&T's consolidated financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Among other provisions, it requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains and losses resulting from changes in the fair values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. This standard is effective for fiscal years beginning after June 15, 1999, though earlier adoption is encouraged and retroactive application is prohibited. For AT&T this means that the standard must be adopted no later than January 1, 2000. Management does not expect the adoption of this standard to have a material impact on AT&T's results of operations, financial position or cash flows. Form 8-K/A AT&T Corp. October 16, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OTHER DEVELOPMENTS On July 23, 1998, AT&T completed the merger with TCG, pursuant to an agreement and plan of merger dated January 8, 1998. Each share of TCG common stock was exchanged for 0.943 of AT&T common stock resulting in the issuance of approximately 181.6 million shares in the transaction. The merger was accounted for as a pooling of interests. On March 3, 1998, AT&T agreed to sell WOOD-TV, its television station in Grand Rapids, Michigan, for approximately $123 million, subject to certain adjustments, which is expected to close in the fourth quarter of 1998. On June 24, 1998, AT&T signed a definitive merger agreement with TCI for an all-stock transaction valued at approximately $48 billion. Under the agreement, AT&T will issue 0.7757 shares of AT&T common stock for each share of TCI Group Series A common stock and 0.8533 shares of AT&T common stock for each share of TCI Group Series B stock. The transaction, which is subject to regulatory, shareowner and other approvals, is expected to be completed in the first half of 1999. Also announced was TCI's intention to combine Liberty Media Group, its programming arm, and TCI Ventures Group, its technology investments unit, to form the new Liberty Media Group. Upon closing of the AT&T/TCI merger, the shareowners of the new Liberty Media Group will be issued separate tracking stock by AT&T in exchange for the shares currently held in Liberty Media Group and TCI Ventures Group. AT&T and BT announced on July 26, 1998 that they will create a global venture to serve the complete communications needs of multinational companies and the international calling needs of individuals and businesses around the world. The venture, which will be owned equally by AT&T and BT, will combine trans-border assets and operations of each company, including their existing international networks, all of their international traffic, all of their border products for business customers - including an expanding set of Concert services - and AT&T and BT's multinational accounts in selected industry sectors. The formation of the venture is subject to certain conditions, including receipt of regulatory approvals and the purchase by BT of MCI Communication Corporation's interest in Concert and the final negotiation and execution of definitive documents. The transaction is expected to be completed within 12 months. Based on the merger agreement, AT&T may be required to exit certain operations which compete directly with BT. A full review is currently underway to determine the size and scope of any international restructurings. Management expects to have definitive plans in place by the end of 1998, and accordingly, a restructuring charge associated with this review will be forthcoming. In August of 1998, AT&T extinguished approximately $1 billion of debt. The early extinguishment of debt resulted in an after-tax charge of $137 million and has been recorded as an extraordinary loss. Form 8-K/A AT&T Corp. October 16, 1998 FORWARD LOOKING STATEMENTS Except for the historical statements and discussions contained herein, statements contained in this Report on Form 8-K/A constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Any Form 10-K, Annual Report to Shareowners, Form 10-Q or Form 8-K of AT&T may include forward looking statements, including statements concerning future operating performance, AT&T's share of new and existing markets, AT&T's short- and long-term revenue and earnings growth rates, and general industry growth rates and AT&T's performance relative thereto. These forward looking statements rely on a number of assumptions concerning future events, including the adoption and implementation of balanced and effective rules and regulations by the FCC and the state public regulatory agencies, and AT&T's ability to achieve a significant market penetration in new markets. These forward looking statements are subject to a number of uncertainties and other factors, many of which are outside AT&T's control, that could cause actual results to differ materially from such statements. For a more complete discussion of the factors that could cause actual results to differ materially from such forward looking statements, see the discussion thereof contained under the heading "Forward Looking Statements" in the Company's Form 10-K for the year ended December 31, 1997. Readers should also consider the factors discussed under the headings "Results of Operations" and "Financial Condition" included in this Form 8-K/A. AT&T disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Form 8-K/A AT&T Corp. October 16, 1998 CONSOLIDATED STATEMENTS OF INCOME (Dollars in Millions Except Per Share Amounts) (Unaudited) For the Six Months Ended June 30, 1998 1997 Revenues................................... $26,042 $25,584 Operating Expenses Access and other interconnection........... 7,830 8,513 Network and other communications services................... 4,753 4,612 Depreciation and amortization ............. 2,194 1,908 Selling, general and administrative ....... 7,089 7,453 Restructuring and other charges............ 3,344 - Total operating expenses .................. 25,210 22,486 Operating income........................... 832 3,098 Other income - net ........................ 1,013 239 Interest expense .......................... 208 166 Income from continuing operations before income taxes ...................... 1,637 3,171 Provision for income taxes ................ 582 1,251 Income from continuing operations ......... 1,055 1,920 Income from discontinued operations (net of taxes of $6 and $43).............. 10 69 Gain on sale of discontinued operation (net of tax of $799) ..................... 1,290 - Net income ................................ $ 2,355 $ 1,989 Weighted average common shares and potential common shares (millions)*....... 1,813 1,783 Per common share - basic: Income from continuing operations ........ $ 0.59 $ 1.08 Income from discontinued operations....... 0.01 0.04 Gain on sale of discontinued operation.... 0.71 - Net income ............................... $ 1.31 $ 1.12 Per common share - diluted: Income from continuing operations ........ $ 0.58 $ 1.08 Income from discontinued operations....... 0.01 0.04 Gain on sale of discontinued operation.... 0.71 - Net income ............................... $ 1.30 $ 1.12 Dividends declared per common share........ $ 0.66 $ 0.66 *Amounts represent the weighted-average shares assuming dilution from the potential exercise of stock options. Amounts are reduced by 16 and 7 million for the six month periods ended June 30, 1998, and 1997, respectively, assuming no dilution. Form 8-K/A AT&T Corp. October 16, 1998 CONSOLIDATED BALANCE SHEETS (Dollars in Millions Except Share Amounts) (Unaudited) June 30, December 31, 1998 1997 ASSETS Cash and cash equivalents .............. $ 7,845 $ 318 Marketable securities................... 123 307 Receivables less allowances of $1,044 and $988 Accounts receivable................... 8,850 8,675 Other receivables..................... 404 5,684 Deferred income taxes................... 1,440 1,252 Other current assets.................... 517 541 Total current assets.................... 19,179 16,777 Property, plant and equipment, net of accumulated depreciation of $23,815 and $22,233 .................. 24,244 24,203 Licensing costs, net of accumulated amortization of $1,168 and $1,076..... 8,272 8,368 Investments............................. 3,221 3,866 Long-term receivables................... 671 1,794 Prepaid pension costs................... 1,942 2,156 Other assets............................ 3,444 2,830 Net assets of discontinued operation.... - 1,101 TOTAL ASSETS............................ $60,973 $61,095 (CONT'D) Form 8-K/A AT&T Corp. October 16, 1998 CONSOLIDATED BALANCE SHEETS (CONT'D) (Dollars in Millions Except Share Amounts) (Unaudited) June 30, December 31, 1998 1997 LIABILITIES Accounts payable....................... $ 6,009 $ 6,402 Payroll and benefit-related liabilities.......................... 1,623 2,390 Debt maturing within one year.......... 1,175 4,085 Dividends payable...................... 538 538 Other current liabilities.............. 5,380 3,902 Total current liabilities.............. 14,725 17,317 Long-term debt......................... 7,161 7,857 Long-term benefit-related liabilities.. 5,419 3,142 Deferred income taxes.................. 4,662 5,711 Other long-term liabilities and deferred credits..................... 3,339 3,390 Total liabilities ..................... 35,306 37,417 SHAREOWNERS' EQUITY Common shares - par value $1 per share. 1,806 1,789 Authorized shares: 6,000,000,000 Outstanding shares: 1,806,071,000 at June 30, 1998; 1,789,013,000 at December 31, 1997 Additional paid-in capital............. 18,063 17,121 Guaranteed ESOP obligation............. (58) (70) Retained earnings...................... 5,905 4,876 Accumulated other comprehensive income............................... (49) (38) Total shareowners' equity.............. 25,667 23,678 TOTAL LIABILITIES & SHAREOWNERS' EQUITY $60,973 $61,095 See Notes to Consolidated Financial Statements. Form 8-K/A AT&T Corp. October 16, 1998 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (Dollars in Millions) (Unaudited) For the Six Months Ended June 30, 1998 1997 Common Shares Balance at beginning of year............... $ 1,789 $ 1,774 Shares issued, net: Under employee plans..................... 2 2 Under shareowner plans................... - - For acquisitions......................... 15 5 Balance at end of period................. 1,806 1,781 Additional Paid-In Capital Balance at beginning of year............... 17,121 16,624 Shares issued(acquired), net: Under employee plans..................... 52 55 Under shareowner plans................... - 9 For acquisitions......................... 807 89 Other.................................... 83 18 Balance at end of period..................... 18,063 16,795 Guaranteed ESOP Obligation Balance at beginning of year............... (70) (96) Amortization............................... 12 13 Balance at end of period..................... (58) (83) Retained Earnings Balance at beginning of year............... 4,876 2,790 Net income................................. 2,355 $2,355 1,989 $1,989 Dividends declared......................... (1,072) (1,073) Treasury shares issued at less than cost... (257) (52) Other changes.............................. 3 4 Balance at end of period..................... 5,905 3,658 Accumulated Other Comprehensive Income Balance at beginning of year............... (38) - Other Comprehensive Income (net of taxes of ($49) and ($8)) ........ (11) (11) (38) (38) Total Comprehensive Income................. $2,344 $1,951 Balance at end of period..................... (49) (38) Total Shareowners' Equity.................... $25,667 $22,113 See Notes to Consolidated Financial Statements. Form 8-K/A AT&T Corp. October 16, 1998 CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Millions) (Unaudited) For the Six Months Ended June 30, 1998 1997 Operating Activities Net income ............................... $ 2,355 $ 1,989 Deduct: Income from discontinued operations ..................... 10 69 Gain on sale of discontinued operation....................... 1,290 - Income from continuing operations ........ 1,055 1,920 Adjustments to reconcile net income to net cash provided by operating activities of continuing operations: Restructuring and other charges........ 3,344 - Gains on sales......................... (770) (97) Depreciation and amortization.......... 2,194 1,908 Provision for uncollectibles........... 714 812 Increase in accounts receivable........ (872) (437) Increase(decrease) in accounts payable. 131 (124) Net increase in other operating assets and liabilities............... (666) (1,350) Other adjustments for noncash items - net.......................... (1,217) 148 Net cash provided by operating activities of continuing operations..... 3,913 2,780 Investing Activities Capital expenditures.................... (3,289) (3,147) Proceeds from sale or disposal of property, plant and equipment......... 45 48 Decrease in other receivables........... 6,404 923 Acquisitions of licenses................ (55) (291) Sales of marketable securities.......... 1,239 161 Purchases of marketable securities...... (1,055) (82) Equity investment distributions and sales 1,202 113 Equity investment contributions......... (58) (267) Proceeds from dispositions.............. 4,172 657 Other investing activities - net........ (58) (54) Net cash provided by(used in) investing activities of continuing operations..... 8,547 (1,939) (CONT'D) Form 8-K/A AT&T Corp. October 16, 1998 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D) (Dollars in Millions) (Unaudited) For the Six Months Ended June 30, 1998 1997 Financing Activities Proceeds from long-term debt issuance.. 2 2 Retirements of long-term debt.......... (729) (472) Acquisition of common shares - net..... (215) 28 Dividends paid......................... (1,072) (1,070) Decrease in short-term borrowings - net..................... (3,027) 562 Other financing activities - net....... 16 31 Net cash used in financing activities of continuing operations............... (5,025) (919) Net cash provided by discontinued operations................ 92 11 Net increase(decrease) in cash and cash equivalents....................... 7,527 (67) Cash and cash equivalents at beginning of year................... 318 196 Cash and cash equivalents at end of period....................... $ 7,845 $ 129 See Notes to Consolidated Financial Statements. Form 8-K/A AT&T Corp. October 16, 1998 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) (a) BASIS OF PRESENTATION The consolidated financial statements have been prepared by AT&T Corp. ("AT&T" or the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and, in the opinion of management, include all adjustments, necessary for a fair statement of the consolidated results of operations, financial position and cash flows for each period presented. The consolidated results for interim periods are not necessarily indicative of results for the full year. (b) RESTRUCTURING AND OTHER CHARGES During the first quarter AT&T recorded a pre-tax charge of $601 related to the Company's decision not to pursue Total Service Resale (TSR) as a local service strategy. The Regional Operating Companies have made it extremely difficult to enter the local market under a TSR strategy. After spending several billions of dollars in an attempt to enter this market, it became clear to AT&T that both the economics and AT&T's ability to properly service its customers were not acceptable. This has compelled AT&T to exit TSR as a strategy for residential and certain business markets. This decision was reached gradually - culminating with a public announcement on January 26, 1998. A thorough financial and operational review of that decision was conducted during the first quarter resulting in an asset impairment recorded as of March 31, 1998. An impairment review was performed using the criteria described in Statement of Financial Accounting Standards (SFAS) No. 86 "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." There were minimal revenues associated with TSR which did not cover the direct costs associated with servicing these customers. The TSR software was designed and developed to uniquely support the TSR option and cannot be utilized to support other connectivity options and accordingly, a determination was made that the software was impaired and should be written-off. Of the $601 charge, the software and software equipment write-offs discussed above were $543 and $42, respectively. An additional $16 related to contractual obligations. AT&T was subject to certain obligations and termination penalties under several vendor contacts that were cancelled during the first quarter as a result of this decision and, therefore, AT&T received no operational benefit from the costs incurred under the contracts. All obligations are expected to be settled in 1998. It was noted during the first quarter 1998 review of the TSR exit that certain fixed assets associated with the local initiative may also be impaired. However, consideration was given to the possibility of an alternative use for these assets pending the merger with TCG, a local service provider. AT&T expects this to be completed by year end. Based on our findings to date over half of the assets which were initially purchased for TSR can be utilized elsewhere in AT&T. However, AT&T does expect an asset impairment charge of approximately $50 to $100 in the fourth quarter of 1998 for assets which could not be utilized or disposed of at book value. Form 8-K/A AT&T Corp. October 16, 1998 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) During the second quarter 1998 AT&T recorded restructuring charges of $2,743 primarily in connection with a plan, announced on January 26, 1998, to reduce headcount by 15,000 to 18,000 over two years as part of the Company's overall cost reduction program. In connection with this plan, a voluntary retirement incentive program (VRIP) was offered to eligible management employees. Approximately 15,300 management employees accepted the VRIP offer. The restructuring charges of $2,743 include a pre-tax charge of $2,724 comprised of $2,412 for pension special termination benefits and other costs and $312 for postretirement special termination benefits and curtailment losses. AT&T originally expected this amount to be partially offset by approximately $1.1 billion of gains to be recognized in the third and fourth quarters of this year as employees' pension benefit obligations are settled. In the third quarter 1998 we recognized a $602 gain associated with the settlement of a portion of the pension obligations. The amount of the gain to be recognized in the fourth quarter is subject to market fluctuations, and therefore, the initial amount forecasted for this gain is likely to change. The second quarter restructuring charges of $2,743 also include pre-tax charges of $125 for related facility costs and $150 for executive separation costs. The second quarter charges were partially offset by the reversal of $256 (pre-tax) of 1995 business restructuring reserves resulting from the overlap of the VRIP acceptance rate on certain 1995 projects. Of the 15,300 employees who accepted the offer, 3,400 were already included as part of previously established 1995 exit plans. Because the benefit cost of the VRIP offer was greater than AT&T's normal severance cost, AT&T had to increase its restructure charge. This increase was accounted for by recording a $2.2 billion charge to reflect the 15,300 employees accepting the offer, and the elimination of the original accrual of approximately $200 AT&T had for the 3,400 employees under the 1995 plan. The balance of approximately $60 related to reserves which were no longer deemed necessary based on the second quarter review. The special termination benefits reflect the value of pension benefit improvements and expanded eligibility for retirement-related benefits, such as medical, dental and life insurance. The program permitted employees to choose either a total lump sum distribution of their pension benefits or periodic future annuity payments. The VRIP offer was formally distributed to eligible management employees during the first week of April and one's irrevocable acceptance had to be postmarked by May 22, 1998 to be valid. Employee exits were spread over three primary dates in 1998, June 30, September 30, and December 30. Substantially all employees terminating under the VRIP will be off roll by December 30, 1998. The VRIP offer was extended to employees who were participants in the AT&T Management Pension Plan at any time from January 1, 1998 through January 21, 1998, inclusive, in a management position lower than Executive level. The individual had to be either on the active payroll or on an approved leave of absence with a guaranteed right of reinstatement. Additionally, to be eligible for the offer, the management employee had to meet the vesting requirements of the AT&T Management Pension Plan by the date they terminate employment. Form 8-K/A AT&T Corp. October 16, 1998 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) The VRIP offer was generally announced to employees on January 26, 1998. During February, management employees received an electronic mail message describing various details about the program. In March, eligible employees received a more detailed written overview of the program. Also in March, AT&T began to offer VRIP seminars for eligible employees in an effort to reinforce the content of the program. During the first week of April, detailed VRIP offer packages, with estimates of employee-specific data, were provided to employees eligible to participate. As of September 30, 1998, approximately 8,200 employees have terminated employment under VRIP and AT&T has settled the pension obligations covering about 8,000 of these employees. Related to these exits, lump sum pension distributions totaling $2.6 billion, which includes a portion of the special pension termination benefits referred to above, have been made to these former employees, resulting in a settlement gain of $602 recorded in the third quarter. In addition, as of November 1, 1998, another 2,400 employees left the business under the VRIP. By December 31, 1998, substantially all of the remaining VRIP participants will have terminated employment and the associated settlement gain will be recorded. AT&T recorded a restructuring charge related to the exit of certain businesses in the fourth quarter of 1995 as part of a three year exit plan. The balance of the 1995 restructuring charge as of September 30, 1998 is $315. This remaining balance is primarily comprised of excess space or abandoned lease space in various facilities and employee termination costs. In many cases it was more appropriate, from an economic standpoint, to continue to lease excess space until the lease contract expires than to pay the penalties involved with early termination of the lease. The remaining balance of employee termination costs primarily relates to headcount reductions anticipated to occur by year-end. AT&T expects the remainder of the projects supporting the 1995 reserve to be substantially complete by the end of 1998, which is consistent with AT&T's original three-year restructuring plan. AT&T is currently reviewing the status of all open projects and will make appropriate adjustments to the reserve balance based on that review. AT&T also recorded $85 of TCG merger related expenses in the third quarter. The net pre-tax benefit to AT&T was $517. In the first three quarters of 1998 the net restructuring and other charges discussed above totaled $2,827 pre-tax. Form 8-K/A AT&T Corp. October 16, 1998 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) (c) DISCONTINUED OPERATIONS Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" (APB 30) the consolidated financial statements of AT&T reflect the dispositions of AT&T's submarine systems business (SSI), which was sold to Tyco International Ltd. on July 1, 1997 for approximately $850, and the sale of AT&T Universal Card Services, Inc. (UCS), which was sold to Citibank on April 2, 1998 for $3,500, as discontinued operations. The after-tax gain resulting from the disposal of UCS was $1,290, or $0.71 per share. Included in the sale was the signing of a co-branding and joint marketing agreement. Accordingly, the revenues, costs and expenses, assets and liabilities, and cash flows of SSI and UCS have been excluded from the respective captions in the Consolidated Statements of Income, Consolidated Balance Sheets and Consolidated Statements of Cash Flows, and have been reported through their respective dates of disposition as "Income from discontinued operations," net of applicable income taxes; as "Net assets of discontinued operations"; and as "Net cash provided by discontinued operations." Summarized financial information for discontinued operations is as follows: For the Six Months Ended June 30, 1998 1997 Revenues $ 365 $1,188 Income before income taxes 16 112 Net income $ 10 $ 69 At June At December 30, 1998 31, 1997 Current assets $ - $7,734 Total assets - 7,808 Current liabilities* - 5,602 Total liabilities* - 6,707 Net assets of discontinued operations $ - $1,101 *Current liabilities include $5,224 of debt maturing within one year and total liabilities include an additional $1,093 of long-term debt at December 31, 1997, both of which were payable to AT&T. On April 2, 1998, we received $5,722 as settlement of these receivables from UCS. No interest expense was allocated to discontinued operations in 1998 or 1997 due to the immateriality of the amounts; however, UCS recorded direct interest expense of $85 and $141 for the six month Form 8-K/A AT&T Corp. October 16, 1998 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) periods ended June 30, 1998, and 1997, respectively. (d) RECLASSIFICATION We have reclassified certain prior period amounts to conform with our current presentation. (e) TELEPORT COMMUNICATIONS GROUP INC. MERGER On July 23, 1998, AT&T completed the merger with TCG, pursuant to an agreement and plan of merger dated January 8, 1998. Each share of TCG common stock was exchanged for 0.943 of AT&T common stock resulting in the issuance of 181.6 million shares in the transaction. The merger was accounted for as a pooling of interests, and accordingly, AT&T's results of operations, financial position and cash flows have been restated to reflect the merger. (f) TELE-COMMUNICATIONS, INC. ACQUISITION On June 24, 1998, AT&T signed a definitive merger agreement with TCI for an all-stock transaction. Under the agreement, AT&T will issue 0.7757 shares of AT&T common stock for each share of TCI Group Series A common stock and 0.8533 shares of AT&T common stock for each share of TCI Group Series B stock. The transaction, which is subject to regulatory, shareowner and other approvals, is expected to be completed in the first half of 1999. Also announced was TCI's intention to combine Liberty Media Group, its programming arm, and TCI Ventures Group, its technology investments unit, to form the new Liberty Media Group. Upon closing of the AT&T/TCI merger, the shareowners of the new Liberty Media Group will be issued separate tracking stock by AT&T in exchange for the shares currently held in Liberty Media Group and TCI Ventures Group. (g) JOINT VENTURE WITH BRITISH TELECOMMUNICATIONS PLC (BT) AT&T and BT announced on July 26, 1998 that they will create a global venture to serve the complete communications needs of multinational companies and the international calling needs of individuals and businesses around the world. The venture, which will be owned equally by AT&T and BT, will combine trans-border assets and operations of each company, including their existing international networks, all of their international traffic, all of their trans-border products for business customers -- including an expanding set of Concert services -- and AT&T and BT's multinational accounts in selected industry sectors. The formation of the venture is subject to certain conditions, including receipt of regulatory approvals and the purchase by BT of MCI Communication Corporation's interest in Concert and the final negotiation and execution of definitive documents. The transaction is expected to be completed within 12 months. Based on the merger agreement, AT&T may be required to exit certain operations which compete directly with BT. A full review is currently underway to determine the size and scope of any international restructurings. Management expects to have definitive plans in place by the end of 1998, and accordingly, a restructuring charge associated with this review will be forthcoming. (h) EXTRAORDINARY LOSS In August 1998, AT&T extinguished approximately $1 billion of debt. This early extinguishment of debt resulted in an after-tax charge to AT&T of $137 and was recorded as an extraordinary loss. EX-99 13 AT&T QUARTERLY CONSOLIDATED STATEMENTS OF INCOME Form 8-K/A October 16, 1998 Exhibit 99.2 AT&T Quarterly Consolidated Statements of Income (Dollars in millions except per share amounts) (Unaudited) For the three months ended Mar. 31 June 30 Mar. 31 June 30 Sept. 30 Dec. 31 1998 1998 1997 1997 1997 1997 REVENUES Business services $ 5,673 $ 5,700 $ 5,428 $ 5,556 $ 5,561 $ 5,485 Consumer services 5,628 5,655 5,928 5,873 5,977 5,749 Wireless services* 1,164 1,313 1,092 1,179 1,190 1,207 Other and corporate 718 831 557 642 692 813 Eliminations (352) (288) (317) (354) (330) (351) Total revenues 12,831 13,211 12,688 12,896 13,090 12,903 OPERATING EXPENSES Access and other interconnection 3,936 3,894 4,266 4,247 3,975 3,862 Network and other communications services 2,388 2,365 2,233 2,379 2,455 2,345 Depreciation and amortization 1,065 1,129 960 948 1,019 1,055 Selling, general and administrative 3,487 3,602 3,613 3,840 3,894 3,650 Restructuring and other charges 601 2,743 - - - - Total operating expenses 11,477 13,733 11,072 11,414 11,343 10,912 Operating income(loss) 1,354 (522) 1,616 1,482 1,747 1,991 Other income - net 706 307 176 63 132 72 Interest expense 80 128 81 85 75 66 Income(loss) from continuing operations before income taxes 1,980 (343) 1,711 1,460 1,804 1,997 Provision for income taxes 726 (144) 668 583 726 746 Income(loss) from continuing operations 1,254 (199) 1,043 877 1,078 1,251 Income from discontinued operations (net of taxes of $6, $0, $25, $18, $6, and $1) 10 - 38 31 20 11 Gain on sale of discontinued operations (net of taxes of $799 and $43) - 1,290 - - 66 - NET INCOME $ 1,264 $ 1,091 $ 1,081 $ 908 $ 1,164 1,262 Weighted average common shares and potential common shares (millions)** 1,806 1,805 1,782 1,784 1,787 1,801 Form 8-K/A October 16, 1998 PER COMMON SHARE (BASIC): Income(loss) from continuing operations $ 0.70 $ (0.11)$ 0.59 $ 0.49 $ 0.60 $ 0.70 Income from discontinued operations .01 - 0.02 0.02 0.01 0.01 Gain on sale of discontinued operations - 0.71 - - 0.04 - NET INCOME $ 0.71 $ 0.60 $ 0.61 $ 0.51 $ 0.65 $ 0.71 PER COMMON SHARE (DILUTED): Income(loss) from continuing operations $ 0.69 $ (0.11)$ 0.59 $ 0.49 $ 0.60 $ 0.69 Income from discontinued operations .01 - 0.02 0.02 0.01 0.01 Gain on sale of discontinued operations - 0.71 - - 0.04 - NET INCOME $ 0.70 $ 0.60 $ 0.61 $ 0.51 $ 0.65 $ 0.70 Dividends declared per common share $ 0.33 $ 0.33 $ 0.33 $ 0.33 $ 0.33 $ 0.33 * Wireless services revenues reflect a reclass for inroaming revenues which were previously netted against expense. Based on AT&T's current accounting policies, the previous accounting was inappropriate. Accordingly, revenues now reflect the amounts billed to customers with the corresponding expense included in network and other communications services expenses. Inroaming revenues were $52 million, $69 million, $52 million, $63 million, $66 million and $51 million for the three month periods ended March 31, 1998, June 30, 1998, March 31, 1997, June 30, 1997, September 30, 1997 and December 31, 1997, respectively. **Amounts represent the weighted-average shares assuming dilution from the potential exercise of stock options. Amounts are reduced by 18 million, 0, 5 million, 8 million, 2 million and 15 million for the three month periods ended March 31, 1998, June 30, 1998, March 31, 1997, June 30, 1997, September 30, 1997 and December 31, 1997, respectively. EX-99 14 POST-MERGER FINANCIAL RESULTS Form 8-K/A Exhibit 99.3 October 16, 1998 Post-Merger Financial Results AT&T Corp. ("AT&T" or the "Company") is filing a condensed statement of income for the month ended August 31, 1998 and a condensed balance sheet at August 31, 1998. All figures reflect the merger between AT&T and Teleport Communications Group, Inc. (TCG) on July 23, 1998, which was accounted for as a pooling of interests. The income statement data for the month ended August 31, 1998, and balance sheet data at August 31, 1998, are derived from AT&T's unaudited consolidated financial statements. AT&T Corp. and Subsidiaries Condensed Statement of Income For the Month Ended August 31, 1998 (Dollars in Millions) (except per share amounts) Total revenue $4,560 Operating expenses 3,575 Operating income 985 Net income before extraordinary loss 619 Extinguishment of debt (net of taxes of $80) (137) Net income $ 482 Earnings per share - basic Net income before extraordinary loss $ 0.34 Extinguishment of debt (0.07) Net income $ 0.27 Earnings per share - diluted Net income before extraordinary loss $ 0.34 Extinguishment of debt (0.07) Net income $ 0.27 Form 8-K/A October 16, 1998 AT&T Corp. and Subsidiaries Condensed Balance Sheet August 31, 1998 Current assets $17,622 Other assets 42,185 Total assets $59,807 Current liabilities $14,589 Other liabilities 19,583 Total liabilities 34,172 Total shareowners' equity 25,635 Total liabilities and shareowners' equity $59,807 Because of rules pertaining to pooling of interest accounting, at least 30 days of post-merger financial results for the combined AT&T and TCG must be published at this time. It is highly unusual for AT&T to publish a single month's results. Because this is so unusual, AT&T cautions that fluctuations in monthly results are not necessarily the same as the trends that would be evident in quarterly reporting, just as the seasonal variation inherent in quarterly results are not apparent in annual results. AT&T believes that, on the whole, August was a good month. Business services revenue rebounded to the pre-outage level while both wireless services revenue and local services revenue were consistent with prior trends. Costs and expenses were down as we continued to drive costs out of the business led by the impact from the lowered headcount due to the Voluntary Retirement Incentive Plan. In the month of August, AT&T recognized an extraordinary loss of $137 million (net of tax) on the early extinguishment of debt. Form 8-K/A AT&T Corp. October 16, 1998 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Shareowners of AT&T Corp: Our audits of the consolidated financial statements referred to in our report dated January 26, 1998, except as to Note 15 for which the date is September 23, 1998, appearing on page 4 on this Current Report on Form 8-K/A of AT&T Corp. and subsidiaries, also included an audit of the consolidated financial statement schedule listed in Item 7 of this Current Report on Form 8-K/A. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP 1301 Avenue of the Americas New York, New York January 26, 1998 Form 8-K/A AT&T Corp. October 16, 1998 Schedule II--Sheet 1 AT&T CORP. AND ITS CONSOLIDATED SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (Millions of Dollars) - -------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E - -------------------------------------------------------------------------------- Balance at Charged to Balance Beginning Costs and at End Description of Period Expenses Deductions(a) of Period - -------------------------------------------------------------------------------- Year 1997 Allowances for doubtful Accounts (b) $1,000 $1,522 $1,485 $1,037 Reserves related to business restructuring, including force and facility consolidation (c) $1,388 $ - $ 481 $ 907 Deferred tax asset valuation Allowance (d) $ 220 $ 142 $ 1 $ 361 Year 1996 Allowances for doubtful Accounts (b) $ 833 $1,518 $1,351 $1,000 Reserves related to business restructuring, including force and facility consolidation (c) $2,092 $ - $ 704 $1,388 Deferred tax asset valuation Allowance (d) $ 151 $ 71 $ 2 $ 220 The Notes on Sheet 2 are an integral part of this Schedule. Form 8-K/A AT&T Corp. October 16, 1998 Schedule II--Sheet 2 AT&T CORP. AND ITS CONSOLIDATED SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (Millions of Dollars) - -------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E - -------------------------------------------------------------------------------- Balance at Charged to Balance Beginning Costs and at End Description of Period Expenses Deductions(a) of Period - -------------------------------------------------------------------------------- Year 1995 Allowances for doubtful Accounts (b) $ 612 $1,125 $ 904 $ 833 Reserves related to business restructuring, including force and facility consolidation (c) $ 699 $1,712 $ 319 $2,092 Deferred tax asset valuation Allowance (d) $ 45 $ 122 $ 16 $ 151 - ------------ (a) Amounts written off as uncollectible, net of recoveries. (b) Includes allowances for doubtful accounts on long-term receivables of $49 $52 and $35 in 1997, 1996 and 1995, respectively (included in long-term receivables in the Consolidated Balance Sheets). (c) Included primarily in other current liabilities and in other long-term liabilities and deferred credits in the Consolidated Balance Sheets. (d) End of period balances include $14, $9 and $10 which represent the current portion of the deferred tax valuation allowance for 1997, 1996 and 1995, respectively. -----END PRIVACY-ENHANCED MESSAGE-----