-----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, UzIzw4in1sV/V1gGoDMjvlbNfsqCb8PNx3ra+ciV6Tzel+PALYehtm+JbzdHNjuP zzWCEszlP38Ri5bS/Z7+8w== 0000005907-97-000023.txt : 19970515 0000005907-97-000023.hdr.sgml : 19970515 ACCESSION NUMBER: 0000005907-97-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 SROS: BSE SROS: CSX SROS: NYSE SROS: PHLX SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AT&T CORP CENTRAL INDEX KEY: 0000005907 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 134924710 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-01105 FILM NUMBER: 97603709 BUSINESS ADDRESS: STREET 1: 32 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10013 BUSINESS PHONE: 2123875400 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN TELEPHONE & TELEGRAPH CO DATE OF NAME CHANGE: 19920703 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q ..X.. QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 OR ..... TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________to _____________ Commission file number 1-1105 AT&T CORP. A New York I.R.S. Employer Corporation No. 13-4924710 32 Avenue of the Americas, New York, New York 10013-2412 Telephone - Area Code 212-387-5400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ..X No ..... At April 30, 1997, 1,624,771,000 common shares were outstanding. AT&T Form 10-Q - Part I PART I - FINANCIAL INFORMATION CONSOLIDATED STATEMENTS OF INCOME (Dollars in Millions Except Per Share Amounts) (Unaudited) For the Three Months Ended March 31, 1997 1996 Revenues Communications services.................... $12,658 $12,370 Financial services ........................ 390 480 Total revenues............................. 13,048 12,850 Operating Expenses Access and other interconnection........... 4,252 4,168 Network and other communications services.. 2,251 1,827 Depreciation and amortization ............. 930 655 Selling, general and administrative ....... 3,587 3,357 Total communications services expenses.... 11,020 10,007 Financial services expenses................ 338 430 Total operating expenses .................. 11,358 10,437 Operating income .......................... 1,690 2,413 Other income - net ........................ 170 105 Interest expense .......................... 49 123 Income from continuing operations before income taxes ..................... 1,811 2,395 Provision for income taxes ................ 689 926 Income from continuing operations ......... 1,122 1,469 Discontinued Operations: Income (loss) from discontinued operations (net of taxes of $3 in 1997 and ($316) in 1996) .......................... 4 (107) Net income ................................ $ 1,126 $ 1,362 Weighted average common shares outstanding (millions).................. 1,628 1,608 Earnings per common share: Income from continuing operations ........ $ 0.69 $ 0.92 Income (loss) from discontinued operations - (0.07) Net income ............................... $ 0.69 $ 0.85 Dividends declared per common share............................ $ .33 $ .33 See Notes to Consolidated Financial Statements. AT&T Form 10-Q - Part I CONSOLIDATED BALANCE SHEETS (Dollars in Millions Except Share Amounts) (Unaudited) March 31, December 31, 1997 1996 ASSETS Cash and cash equivalents .............. $ 415 $ 134 Receivables less allowances of $1,385 and $1,336 Accounts receivable................... 8,720 8,973 Finance receivables................... 6,347 7,087 Deferred income taxes................... 1,408 1,413 Other current assets.................... 569 703 Total current assets.................... 17,459 18,310 Property, plant and equipment, net of accumulated depreciation of $20,233 and $19,728 .................. 19,362 19,794 Licensing costs, net of accumulated amortization of $945 and $913......... 8,080 8,071 Investments............................. 4,000 3,883 Long-term finance receivables........... 701 703 Prepaid pension costs................... 2,011 1,933 Other assets............................ 2,519 2,332 Net assets of discontinued operations... 559 526 TOTAL ASSETS............................ $54,691 $55,552 (CONT'D) AT&T Form 10-Q - Part I CONSOLIDATED BALANCE SHEETS (CONT'D) (Dollars in Millions Except Share Amounts) (Unaudited) March 31, December 31, 1997 1996 LIABILITIES Accounts payable....................... $ 5,653 $ 6,173 Payroll and benefit-related liabilities.......................... 1,949 2,635 Debt maturing within one year.......... 1,934 2,460 Dividends payable...................... 537 536 Other current liabilities.............. 4,619 4,514 Total current liabilities.............. 14,692 16,318 Long-term debt......................... 7,867 7,883 Long-term benefit-related liabilities.. 3,060 3,037 Deferred income taxes.................. 4,868 4,827 Other long-term liabilities and deferred credits..................... 3,338 3,192 Total liabilities ..................... 33,825 35,257 SHAREOWNERS' EQUITY Common stock - par value $1 per share.. 1,624 1,623 Authorized shares: 2,000,000,000 Outstanding shares: 1,624,412,000 at March 31, 1997 1,623,487,646 at December 31, 1996 Additional paid-in capital............. 15,662 15,643 Guaranteed ESOP obligation............. (84) (96) Foreign currency translation adjustments.......................... 30 47 Retained earnings...................... 3,634 3,078 Total shareowners' equity.............. 20,866 20,295 TOTAL LIABILITIES & SHAREOWNERS' EQUITY $54,691 $55,552 See Notes to Consolidated Financial Statements. AT&T Form 10-Q - Part I CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Millions) (Unaudited) For the Three Months Ended March 31, 1997 1996 Operating Activities Net income .............................. $ 1,126 $ 1,362 Add: (Income) loss from discontinued operations ............... (4) 107 Income from continuing operations ....... 1,122 1,469 Adjustments to reconcile net income to net cash provided by operating activities of continuing operations: Depreciation and amortization......... 930 655 Provision for uncollectibles.......... 667 532 Increase in accounts receivable....... (263) (467) Decrease in accounts payable.......... (143) (67) Net increase in other operating assets and liabilities.............. (489) (271) Other adjustments for non-cash items - net......................... (38) 161 Net cash provided by operating activities of continuing operations.... 1,786 2,012 Investing Activities Capital expenditures................... (1,385) (896) Proceeds from sale or disposal of property, plant and equipment........ 30 19 Decrease in finance assets............. 624 612 Acquisitions of licenses............... (54) (23) Net increase in investments............ (188) (151) Dispositions........................... 586 160 Other investing activities - net....... (18) (91) Net cash used in investing activities of continuing operations............... (405) (370) (CONT'D) AT&T Form 10-Q - Part I CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D) (Dollars in Millions) (Unaudited) For the Three Months Ended March 31, 1997 1996 Financing Activities Proceeds from long-term debt issuances. 25 2 Retirements of long-term debt.......... (31) (437) Issuance of common shares.............. 39 512 Treasury shares acquired............... (18) - Dividends paid......................... (535) (527) Decrease in short-term borrowings - net (526) (2,093) Other financing activities - net....... (23) 1,247 Net cash used in financing activities of continuing operations............... (1,069) (1,296) Effect of exchange rate changes on cash........................ (1) (22) Net cash used in discontinued operations. (30) (248) Net increase in cash and cash equivalents........................ 281 76 Cash and cash equivalents at beginning of year................... 134 129 Cash and cash equivalents at end of period....................... $ 415 $ 205 See Notes to Consolidated Financial Statements. AT&T Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) (a) BASIS OF PRESENTATION The consolidated financial statements have been prepared by AT&T Corp. ("AT&T" or the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the consolidated results of operations, financial position and cash flows for each period presented. The consolidated results for interim periods are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with AT&T's 1996 Annual Report to Shareowners, and Form 10-K for the year ended December 31, 1996. (b) 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 Lucent Technologies Inc. ("Lucent"), NCR Corporation ("NCR") and AT&T Capital Corporation ("AT&T Capital") and other businesses in 1996 and the planned disposition of AT&T Submarine Systems Inc. ("SSI") as discontinued operations. Accordingly, the revenues, costs and expenses, assets and liabilities, and cash flows of Lucent, NCR, AT&T Capital, SSI and other businesses 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 (loss) from discontinued operations," net of applicable income taxes; as "Net assets of discontinued operations"; and as "Net cash used in discontinued operations." On April 11, 1997 AT&T announced that it entered into an agreement to sell SSI to Tyco International Ltd. for approximately $850. AT&T Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) Summarized financial information for the discontinued operations is as follows: For the Three Months Ended March 31, 1997 1996 Revenues $ 159 $5,924 Income(loss) before income taxes 7 (423) Net income (loss) 4 (107) At March At Dec. 31, 1997 31, 1996 Current Assets $ 516 $ 554 Total Assets 817 862 Current Liabilities 139 230 Total Liabilities 258 336 Net assets of discontinued operations $ 559 $ 526 The loss before income taxes includes interest expense of $28 for the quarter ended March 31, 1996, allocated to discontinued operations based on the ratio of net assets of discontinued operations to total AT&T consolidated assets. No interest expense was allocated to discontinued operations in the first quarter of 1997 due to immateriality of the amount. AT&T Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) (c) CREDIT HOLDINGS In connection with a March 31, 1993 legal restructuring of AT&T Capital Holdings, Inc. (formerly AT&T Capital Corporation), AT&T issued a direct, full and unconditional guarantee of all the outstanding public debt of AT&T Credit Holdings, Inc. (formerly AT&T Credit Corporation). At March 31, 1997, $58.9 of the guaranteed debt remained outstanding. AT&T Credit Holdings, Inc. holds the finance assets of the former AT&T Credit Corporation and prior to the sale of AT&T Capital on October 1, 1996, held the majority of AT&T's investment in AT&T Capital. The following table shows summarized consolidated financial information for AT&T Credit Holdings, Inc. The summarized financial information includes transactions with AT&T that are eliminated in consolidation . For the Three Months Ended March 31, 1997 1996 Total revenues $ 43 $ 33 Income from continuing operations 9 7 Income from discontinued operation - 26 Net income 9 33 At At March 31, December 31, 1997 1996 Finance receivables $ 1,102 $ 1,102 Total assets 3,087 3,075 Total debt 60 60 Total liabilities 1,904 1,891 Total shareowners' equity $ 1,183 $ 1,184 AT&T Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) (d) OPERATING EXPENSES OF FINANCIAL SERVICES Operating expenses of the financial services segment are comprised of the following: For the Three Months Ended March 31, 1997 1996 Interest Expense $ 73 $ 123 Provision for losses 118 163 Other costs 101 102 Selling, general and administrative 46 42 Total $ 338 $ 430 AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW 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 Lucent Technologies Inc. ("Lucent"), NCR Corporation ("NCR") and AT&T Capital Corporation ("AT&T Capital") and other businesses in 1996 and the planned disposition of AT&T Submarine Systems Inc. ("SSI") as discontinued operations. Accordingly, the revenues, costs and expenses, assets and liabilities, and cash flows of Lucent, NCR, AT&T Capital, SSI and other businesses 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 (loss) from discontinued operations," net of applicable income taxes; as "Net assets of discontinued operations"; and as "Net cash used in discontinued operations." On April 11, 1997 AT&T announced that it entered into an agreement to sell SSI to Tyco International Ltd. for approximately $850 million. Throughout the discussion and analysis of AT&T's results of operations and financial condition, references are made to initiatives in which AT&T is investing, and to AT&T's core business. Initiatives include local service deployment; wireless services in new 1.9 GHz markets, wireless data services and wireless international expansion; AT&T Solutions outsourcing, consulting and systems integration business; online services such as AT&T WorldNet* and AT&T Easy Commerce Services*; and international expansion. AT&T's core business includes business and consumer long distance services, wireless voice services in existing 800 MHz markets, air-to-ground services, one-way messaging, wireless product sales and financial services. All financial data presented on a "core" and "initiatives" basis should be considered approximate. Data on initiatives include costs and expenses on an incremental basis, and require certain estimates and allocations that management believes provide a reasonable basis on which to present such information. (*Service mark of AT&T) AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Revenues from continuing operations grew 1.5% to $13,048 million in the first quarter compared with $12,850 million in the first quarter of 1996. This increase was led by growth in local and other initiatives, business long distance services and wireless services partially offset by declines in financial services and consumer long distance services. Competition continued to affect long distance services revenues and is likely to increase. Operating income decreased 30% to $1,690 million in the first quarter of 1997, compared to $2,413 million in the first quarter of 1996. Operating margin for the first quarter of 1997 decreased to 13.0% from 18.8% in the first quarter of 1996. Earnings before interest and taxes ("EBIT"), which includes other income, was $1,860 million in the first quarter of 1997, a decrease of 26.1% from $2,518 million in the first quarter of 1996. The decrease in both EBIT and operating income was due to higher network and other communications services expenses, higher depreciation and amortization expenses and higher selling, general and administrative expenses, partially offset by higher revenues. Earnings before interest, taxes, depreciation and amortization ("EBITDA"), which includes other income, decreased 11.9% to $2,806 million from $3,188 million in the first quarter of 1996. The decrease was due to higher network and other communications services expenses, and higher selling, general and administrative expenses partially offset by higher revenues. Income from continuing operations was $1,122 million, or $.69 per share. This represents a 23.6% decrease in income from continuing operations and a 25.0% decrease in earnings per share compared with income from continuing operations of $1,469 million, or $.92 per share in the first quarter of 1996. Spending for initiatives diluted earnings per share by approximately $.25 in the first quarter of 1997 and $.10 in the first quarter of 1996. Excluding the dilution from initiatives, earnings per share for the core business decreased 8% to approximately $.94 in the first quarter of 1997 from $1.02 in the first quarter of 1996. Net income for the first quarter of 1997 decreased 17.3% to $1,126 million, or $.69 per share, from $1,362 million, or $.85 per share, in the first quarter of 1996. AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS COMMUNICATIONS SERVICES Communications services revenues increased $288 million or 2.3% for the quarter compared with the first quarter of 1996. Three months ended March 31, In millions 1997 1996 Business long distance services $ 5,452 $ 5,323 Consumer long distance services 6,057 6,119 Wireless services 1,020 896 Local and other initiatives 459 325 Other and eliminations (330) (293) Total communications services revenues $12,658 $12,370 Operating income $ 1,638 $ 2,363 Operating margin 12.9% 19.1% EBIT $ 1,805 $ 2,468 EBITDA $ 2,751 $ 3,138 Long distance services revenues, which include business and consumer long distance services revenues from toll calling, network management, data services, other network-enabled services and related product sales, were $11,509 million in the first quarter of 1997, essentially flat compared to $11,442 million in the first quarter of 1996. Revenue growth in business long distance services was substantially offset by a decrease in consumer long distance services revenue. Total long distance volumes grew 6.7%. The comparison to a leap-year first quarter in 1996 had a negative impact on long distance services volume and revenue growth rates of approximately 1.3% and 1.0%, respectively. Business long distance services revenue increased $129 million or 2.4% compared with the first quarter of 1996. The revenue increase quarter over quarter was driven by double-digit growth in revenues from data services and by solid double-digit volume growth. The volume growth was led by strength in business inbound, toll-free 800 and 888 services, and in government markets. The gap between revenue and volume growth was primarily due to pricing pressures on many new business contracts resulting from increased competition and the uncertainty surrounding detariffing, and from a greater level of lower-priced volume in government markets. These pricing pressures will likely continue throughout the year and negatively impact revenue growth. AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Consumer long distance services revenue decreased $62 million or 1.0% compared with the first quarter of 1996. The contra-revenue associated with issuing free minutes to customers in our acquisition and retention programs reduced the consumer long distance services revenue growth rate by approximately 1.0%. Domestic price increases in the fourth quarter of 1996 were primarily offset by promotional pricing on international calling. Volumes were essentially flat compared to the first quarter of 1996 as double-digit growth in U.S.-originated international calling volumes was offset by declines in domestic volumes. In addition, consumer long distance services revenues were negatively impacted by competitive pressures from traditional and non-traditional sources such as smaller telecommunications companies, non-RBOC local exchange carriers and dial-around companies. The increased competition in the consumer markets will continue to impact growth throughout 1997. Additionally, factors such as the strategic shift from issuing checks to providing free minutes will have a negative impact on revenue growth in the future. Wireless services revenue, which includes wireless voice and data, messaging, air-to-ground services, and the sales of wireless products grew $124 million or 13.9% in the first quarter of 1997 compared to the first quarter of 1996, driven by increased cellular subscribers and higher wireless product sales. Cellular revenue rose 12.3% to $832 million while consolidated cellular subscribers increased 25.8% to 5.3 million at the end of the quarter from 4.2 million at the end of the first quarter 1996. On a consolidated basis, this represents a voice penetration rate of 8.0% in the first quarter of 1997, up from 6.3% in the first quarter of 1996. During the quarter, net additions to consolidated subscribers were 251 thousand, representing a 9.7% decrease over the first quarter of 1996 net additions. The decline in the growth rate for net additions primarily reflects additional competitors entering certain markets. The disposal of several wireless properties at the end of 1996 reduced the growth rates for both cellular revenue and consolidated subscribers by approximately 2.6% when compared to the first quarter of 1996. Total cellular customers served by companies in which AT&T has or shares a controlling interest increased 24.9% to 7.3 million at March 31, 1997 from 5.9 million at March 31, 1996. On this basis, the voice penetration rate rose to 7.8% this quarter from 5.1% in the first quarter of last year. Average revenue per subscriber continued to decline in the first quarter of 1997 to $53 per subscriber from $60 in the first quarter of 1996, reflecting industry wide pricing pressures experienced by cellular service providers, as well as lower average usage per subscriber. The lower average usage per subscriber is attributed to growth in subscribers who are more casual users (e.g. for emergency and other personal use). Average revenue per subscriber is expected to continue to decline throughout 1997. AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Revenues from local and other initiatives includes revenues from AT&T Solutions' consulting, outsourcing, and systems integration business, AT&T WorldNet and other online services, international expansion and local service deployment. Revenues from these initiatives increased $134 million or 41.2% from the first quarter of 1996, primarily due to growth in revenues from AT&T Solutions' and from AT&T WorldNet and other online services. AT&T WorldNet had approximately 884,000 subscribers and AT&T Easy Commerce Services had more than 3,100 hosted sites at the end of the first quarter 1997. Other and eliminations reflects the elimination of revenues for services sold between revenue categories (e.g., sales of business long distance services to other units). Operating expenses for communications services increased $1,013 million or 10.1% for the first three months of 1997 compared with the first quarter of 1996. The increase was driven by higher network and other communications services expenses, higher depreciation and amortization and higher selling, general and administrative expenses. The increase also includes $160 million in charges relating to the closing of wireless services' two-way messaging initiative, partially offset by approximately $100 million relating to the reversal of certain pre-1995 restructuring reserves in the core business. The reversals relate to reserves created several years ago for restructuring activities which have been completed. Access and other interconnection expenses increased $84 million, or 2.0%, primarily due to increased volumes partially offset by changes in domestic traffic mix and by lower international accounting rates. Access rates continue to decline, however, barring structural reform of the access and settlement rates systems, this decline is expected to level off. Access and other interconnection expenses as a percentage of communications services revenues were essentially flat at 33.6% for the first quarter of 1997 as compared to 33.7% for the first quarter of 1996. Network and other communications services expenses increased $424 million, or 23.2%, from the first quarter of 1996. The increase was primarily attributable to increased costs for initiatives, particularly AT&T Solutions, AT&T WorldNet and other online services and half of the charge recorded to exit wireless services' two-way messaging business. The remaining increase was driven by higher provisions for uncollectibles and compensation to payphone operators resulting from a recent Federal Communications Commission ("FCC") ruling, partially offset by approximately half of the pre-1995 restructuring reserve reversals. AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Depreciation and amortization increased $275 million, or 42.2%, from the first quarter of 1996 driven by the higher levels of capital expenditures in 1996, particularly in the fourth quarter when purchases from Lucent were recorded at their full commercial price and by half of the charge recorded to exit the two-way messaging business. Selling, general and administrative ("SG&A") expenses increased $230 million, or 6.7%, from the first quarter of 1996. SG&A as a percentage of communications services revenue was 28.3% for the first quarter, up from 27.2% in the first quarter of 1996. The higher SG&A expenses are due to higher customer acquisition and retention costs in consumer long distance services, including the use of checks as an acquisition tool and higher retention and acquisition costs in wireless services, despite a decrease in wireless services' cost per customer acquisition (cost per gross add, "CPGA"). Wireless services' CPGA was $402 in the first quarter of 1997, down 1.8% from $409 in the first quarter of 1996. The decrease is due to an emphasis on lower cost distribution channels partially offset by the cost of moving customers to digital service. These increases were partially offset by approximately half of the pre-1995 restructuring reserve reversals. Also contributing to the increase was spending on initiatives, particularly local service deployment and international expansion. The operating margin for communications services decreased to 12.9% for the first quarter of 1997 from 19.1% in the first quarter of 1996. EBIT, which includes other income, for communications services decreased 26.8% to $1,805 million in the first quarter of 1997 from $2,468 million in the first quarter of 1996. EBIT for communications services includes ($33) million and $92 million for wireless services in the first quarter of 1997 and 1996, respectively. EBIT for wireless services was diluted by approximately $.2 billion in the first quarter of 1997 relating to wireless initiatives, including the costs to exit the two-way messaging business. In the first quarter of 1996 dilution from wireless initiatives was not material. Additionally, EBIT for communications services in the first quarters of 1997 and 1996 includes dilution relating to local service deployment of approximately $.2 billion and $.1 billion, respectively, and dilution relating to other initiatives of approximately $.3 billion and $.2 billion, respectively. EBITDA, which includes other income, for communications services decreased 12.3% to $2,751 million in the first quarter of 1997 from $3,138 million in the first quarter of 1996. Wireless services EBITDA was $244 million in the first quarter of 1997 and $267 million in the first quarter of 1996, including dilution of approximately $.1 billion in the first quarter of AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 1997 relating to wireless initiatives and costs to exit the two-way messaging business. In the first quarter of 1996 dilution from wireless initiatives was not material. Similarly, EBITDA for communications services includes dilution relating to local service deployment of approximately $.1 billion in both the first quarters of 1997 and 1996, and dilution of approximately $.3 billion and $.2 billion for other initiatives in the first quarters of 1997 and 1996, respectively. AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FINANCIAL SERVICES Financial services revenues decreased $90 million, or 18.7%, for the quarter compared with the first quarter of 1996. The decline was primarily a result of the Universal Card Services Corp. ("Universal Card") securitization program but also reflects lower card usage and the impact of promotional pricing. In the first quarter of 1997, AT&T adopted Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Among other provisions, this standard requires Universal Card to recognize anticipated revenue from securitized receivables. The adoption of this standard resulted in a benefit to revenue in the quarter. Three months FINANCIAL SERVICES ended March 31, In millions 1997 1996 Financial services revenue $390 $480 Operating income $ 52 $ 50 Operating margin 13.5% 10.4% EBT $ 55 $ 50 Universal Card Information: At March 31, In millions 1997 1996 Total book finance receivables $ 6,309 $ 9,914 Total managed finance receivables $12,809 $13,414 Cardholder accounts 18.4 17.9 Universal Card's book receivables, which exclude the $6.5 billion of receivables that have been securitized to date, were $6.3 billion at the end of the first quarter. Universal Card retained the servicing and customer relationships of the securitized credit card accounts. Including securitized receivables, Universal Card's total managed receivables were $12.8 billion at the end of the first quarter, down $0.6 billion from the first quarter of 1996. The decline is primarily due to management action to reduce customer acquisitions in 1996, resulting in lower card usage. Financial services expenses decreased $92 million, or 21.1%, in the first quarter of 1997 as compared with the first quarter of 1996. The decrease reflects a decline in direct portfolio expenses (interest, provisions for losses, and other related costs) of $96 million due to decreased receivable AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION balances associated with the securitization program and lower card usage. The decreases in direct portfolio expenses caused by the decrease in receivables were partially offset by increases in net charge-offs as a percentage of average credit card receivables outstanding ("charge-off rate"). The charge-off rate for credit card receivables was 7.2% for the first quarter of 1997, up from 5.4% in the first quarter 1996. The charge-off rate relating to managed receivables increased to 6.5% in the first quarter from 5.6% in the first quarter of 1996. Delinquencies, or payments that are thirty days or more past due, were 3.8% of average managed receivables as of March 31, 1997, down from 3.9% as of March 31, 1996. Financial services operating income increased $2 million compared to the first quarter of 1996 and the operating margin percentage increased to 13.5% for the first quarter of 1997 from 10.4% in the first quarter of 1996. Earnings before taxes ("EBT"), including other income, increased 10.0% to $55 million in the first quarter of 1997, from $50 million in the first quarter of 1996. The revenue recognized in accordance with SFAS No. 125 represented a substantial portion of operating income and EBT in the first quarter of 1997. OTHER INCOME STATEMENT ITEMS Other income increased $65 million quarter over quarter, primarily due to the gain of approximately $100 million on the sale of AT&T Skynet Satellite Services, partially offset by lower earnings from equity investments. Interest expense decreased $74 million, or 59.7%, to $49 million in the first quarter of 1997 due to lower levels of average debt partially offset by higher interest rates. The provision for income taxes decreased $237 million for the quarter, reflecting the lower income before income taxes and a lower effective tax rate. The effective tax rate for the first quarter of 1997 was 38.0%, down from 38.7% in the first quarter of 1996, primarily reflecting nonrecurring items and higher research tax credits in the first quarter of 1997. Income from discontinued operations increased $111 million in the first quarter of 1997 compared with the same period last year. In the first quarter of 1997, income from discontinued operations reflects the results of SSI, which AT&T has agreed to sell. In the first quarter of 1996, the loss from discontinued operations includes the results of Lucent, NCR, AT&T Capital, SSI and other businesses. The dispositions of Lucent, NCR and AT&T Capital and other businesses were successfully completed during 1996. Discontinued operations also includes the elimination of intercompany transactions, an allocation of AT&T's interest expense (based on the ratio AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION of net assets of discontinued operations to total AT&T consolidated assets) in the first quarter of 1996, and a portion of AT&T's consolidated taxes attributable to discontinued businesses. Included in the loss from discontinued operations for the first quarter of 1996 is a nonrecurring tax benefit of $155 million which was the result of reversing deferred tax liabilities on the undistributed earnings of Lucent's non-United States consolidated subsidiaries. FINANCIAL CONDITION MARCH 31, 1997 VERSUS DECEMBER 31, 1996 Total assets consist of the following: March 31, Dec. 31, In billions 1997 1996 Long distance - business and consumer $ 19.7 $ 20.3 Wireless Services 16.3 16.2 Local service initiative 2.7 2.7 Other initiatives 2.0 1.8 Other 5.6 5.5 Total communications services 46.3 46.5 Financial Services 7.8 8.5 Net assets of discontinued operations .6 .6 Total assets $ 54.7 $ 55.6 Total assets decreased $861 million, or 1.6% in the first three months of 1997. This decrease is primarily due to declines in current assets and in net property, plant and equipment. The current asset decline was driven by decreases in finance receivables and accounts receivable partially offset by an increase in cash. Finance receivables decreased from December 31, 1996 mainly due to the normal seasonal decline as a result of higher levels of consumer purchases in the last months of the year with increased payments resulting in the first quarter. The decrease in accounts receivable was primarily due to the collection of employee benefit-related receivables from Lucent. The decrease in net property, plant and equipment primarily reflects the sale of AT&T Skynet Satellite Services. AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Total liabilities decreased $1,432 million from December 31, 1996 primarily reflecting lower payroll and benefit-related liabilities, a lower level of debt maturing within one year and lower accounts payable. Payroll and benefit-related liabilities decreased due to the annual payment of year-end employee bonuses in the first quarter of 1997. Debt maturing within one year decreased primarily due to lower levels of debt for Universal Card driven by the decrease in finance receivables previously discussed. Accounts payable decreased primarily reflecting payments for capital expenditures and other purchases accrued for at the end of 1996. Shareowners' equity increased $571 million primarily resulting from net income for the first quarter of 1997 partially offset by dividends paid. The ratio of total debt to total capital (total debt and equity) decreased to 32.0% at March 31, 1997, compared with 33.8% at December 31, 1996. Excluding financial services operations, the debt ratio was 18.4% at March 31, 1997 compared with 18.7% at December 31, 1996. 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. AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION CASH FLOWS THREE MONTHS ENDED MARCH 31, 1997 VERSUS THREE MONTHS ENDED MARCH 31, 1996 Cash flows provided by operating activities of continuing operations of $1,786 million decreased $226 million for the three months ended March 31, 1997 compared to the first quarter of 1996 primarily reflecting the payment of taxes in the first quarter of 1997 resulting from the sale of AT&T Capital in 1996, partially offset by the collection of employee benefit-related receivables from Lucent. For the three months ended March 31, 1997, cash used in investing activities of $405 million increased $35 million from the first quarter of 1996 primarily reflecting increased cash payments for capital expenditures partially offset by an increase in dispositions reflecting the proceeds from the sale of Skynet. Capital expenditures includes cash payments in the first quarter of 1997 for expenditures made in the fourth quarter of 1996. Capital expenditures for the first quarter of 1997 on an accrual basis were approximately $1.0 billion, an increase of approximately $.2 billion from the first quarter of 1996. Long distance services accounted for $.6 billion of the first quarter capital expenditures, an increase of $.1 billion compared to the first quarter of 1996. AT&T expects capital expenditures for the year to total between $8 billion and $9 billion. Net cash used in financing activities of $1,069 million decreased $227 million from $1,296 million in the first quarter of 1996. The activity for the first quarter of 1996 included a large decrease in debt, partially offset by an increase in cash provided by other financing activities, both as a result of Lucent spin-related transactions. Net cash used in financing activities for the first quarter of 1997 was also impacted by a reduction in cash provided from the issuance of common shares. This reduction is consistent with our intention to satisfy the share requirements for our employee plans through open market purchases rather than the issuance of new shares. Future financing is contemplated to be arranged as necessary to meet our capital and other requirements with the timing of issue, principal amount and form depending on our needs, prevailing market and general economic conditions. We anticipate obtaining all necessary external financing through issuances of commercial paper, long-term debt and equity, asset-backed financings (i.e., securitizations) and available lines of credit. AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RECENT PRONOUNCEMENTS In February 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". Among other provisions, the standard sets forth provisions for calculating basic and diluted earnings per share and requires disclosure of both on the face of the income statement for income from continuing operations and net income. As prescribed by the standard, the basic earnings per share calculation includes only common shares outstanding while diluted earnings per share includes all common shares and dilutive potential common shares outstanding. The standard is effective for both interim and annual periods ending after December 15, 1997. For AT&T, this means that the standard is effective December 31, 1997. Since the standard applies to the earnings per share calculation, it will not have any impact on AT&T's results of operations, financial position or cash flows, and will not have a material impact on AT&T's results of operations reported on a per share basis. LEGISLATIVE AND REGULATORY DEVELOPMENTS In the first quarter of 1997, AT&T continued to expand its local service offerings as permitted under the Telecommunications Act of 1996 (the "Telecommunications Act"). The Telecommunications Act, among other things, was designed to foster local exchange competition by establishing a regulatory framework to govern new competitive entry in local and long distance telecommunications services. The Telecommunications Act will permit Regional Bell Operating Companies ("RBOCs") to provide interexchange services after demonstrating to the FCC that such provision is in the public interest and satisfying the conditions for developing local competition established by the Telecommunications Act. At April 30, 1997 AT&T had received authority to provide service in 45 states and the District of Columbia. As of such date, AT&T was offering AT&T Digital Link outbound local service for medium- and large-sized business customers in 45 states and offering resold local service to consumers and smaller business customers in California, Connecticut, Michigan and Illinois. In order to implement the local competition provisions of the Telecommunications Act, the FCC adopted rules and regulations, including pricing rules (the "Pricing Rules") with respect to the terms and conditions of interconnection with local exchange carrier ("LEC") networks and the standards governing the purchase of unbundled elements and wholesale services from LECs. These implementing rules rely on each state to develop the specific rates and procedures in such state within the framework prescribed by the FCC. However, in October 1996, the 8th Circuit Court of Appeals ordered a stay of the effectiveness of the Pricing Rules, pending resolution of challenges thereto by local telephone companies and AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION telephone regulators in several states. The court heard argument on the challenges in January 1997. Absent effectiveness of the Pricing Rules, each state will determine the applicable rates and procedures independent of the framework of the Pricing Rules. However, since the stay was issued, many states have used the Pricing Rules as guidelines in establishing interim rates that will apply pending the determination of permanent rates in subsequent state proceedings. Nevertheless, there can be no assurance that the prices and other conditions established in each state will provide for effective local service entry and competition or provide AT&T with new market opportunities. As a result of the legislative and regulatory developments discussed above, there can be no assurance that all of the necessary preconditions for the development of effective local competition will be achieved in a timely or even manner and that long distance carriers will be in a position to compete effectively against RBOCs in local service at the time RBOCs receive permission to enter the long distance market. Because it is widely anticipated that substantial numbers of long distance customers will seek to purchase local, interexchange and other services from a single carrier as part of a combined or full service package, any competitive disadvantage, inability to profitably provide local service at competitive rates or delays or limitations in providing local service or combined service packages could adversely affect AT&T's future revenues and earnings. In addition, on May 7, 1997, the FCC announced the adoption of three orders relating to Price Caps, Access Reform, and Universal Service that will result in substantial revisions to the level and structure of access charges that AT&T as a long distance carrier pays to incumbent LECs. The Price Cap Order requires LECs to reduce their price cap indices by 6.5 percent annually, less an adjustment for inflation, which is likely to result in a reduction in the interstate access charges that long distance carriers, such as AT&T, pay to LECs. The Access Charge Reform Order restructured access charges so that certain costs that do not vary with usage will be recovered on a flat-rate basis and permits increased flat-rate assessments on multiline business customers and on residential lines beyond the primary telephone line. This restructuring allows a reduction in access charges assessed on long distance carriers on a usage basis. Finally, the Universal Service Order adopts a new mechanism for funding universal service which expands the set of carriers that must contribute to support universal service from only long-distance carriers to all carriers, including LECs, that provide interstate telecommunications services. Similarly, the set of carriers eligible for the unversal service support has been expanded from only LECs to any eligible carrier providing AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION local service to a customer, including AT&T as a new entrant in local markets. The Universal Service Order also adopted measures to provide discounts on telecommunications services, Internet access and inside wire to eligible schools and libraries and rural health carrier providers. COMPETITION AT&T currently faces significant competition in the communication and information services industry and expects that the level of competition will continue to increase. For example, non-RBOC LECs, which are not required to implement the Telecommunications Act's competitive checklist prior to offering long distance in their home markets, have begun integrating their local service offerings with long distance offerings in advance of AT&T being able to offer combined local and long distance service in these areas. This forward integration adversely affected AT&T's consumer long-distance revenues and earnings in these service regions in the first quarter of 1997. In addition, most of the RBOCs have indicated their intention to petition the FCC during 1997 for permission to provide interexchange services in one or more states within their home market. To the extent that the RBOCs obtain in-region interLATA authority before the Telecommunications Act's checklist of conditions have been fully or satisfactorily implemented and adequate facilities-based local exchange competition exists, there is a substantial risk that AT&T and other interexchange service providers would be at a disadvantage to the RBOCs in providing both local service and combined service packages. In addition to the matters referred to above, various other factors, including market acceptance, start-up and ongoing costs associated with the provision of new services and local conditions and obstacles, could adversely affect the timing and success of AT&T's entrance into the local exchange services market and AT&T's ability to offer combined service packages that include local service. In addition, the simultaneous entrance of numerous new competitors for interexchange and combined service packages is likely to adversely affect AT&T's long distance revenues and could adversely affect earnings. FORWARD LOOKING STATEMENTS Except for the historical statements and discussions contained herein, statements contained in this Report on Form 10-Q 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. In addition, other written or oral AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION statements which constitute forward looking statements have been made and may in the future be made by or on behalf of AT&T. 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 AT&T's 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, AT&T's ability to achieve a significant market penetration in new markets and the related costs thereof, and competitive pressures. For a more detailed description of the uncertainties and other factors that could cause actual results to differ materially from such forward-looking statements, see the discussion thereof contained in the Company's Form 10-K for the year ended December 31, 1996 under the section entitled "Forward LookingStatements". 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. AT&T Form 10-Q - Part II Item 5. Other Information AT&T Quarterly Data (Dollars in millions except per share amounts) (Unaudited) Year For the Three Months Ended Ended Mar. 31, June 30 Sep. 30, Dec. 31, Dec. 31, 1996 1996 1996 1996 1996 Revenues Business Long Distance Services $ 5,323 $ 5,375 $ 5,514 $ 5,379 $21,591 Consumer Long Distance Services 6,119 6,034 6,225 6,272 24,650 Wireless Services 896 957 994 1,084 3,931 Local & Other Initiatives 325 358 407 479 1,569 Eliminations and Other (293) (275) (308) (350) (1,226) Total Communications Services 12,370 12,449 12,832 12,864 50,515 Financial Services 480 419 396 374 1,669 Total Revenues $12,850 $12,868 $13,228 $13,238 $52,184 EBIT Communications Services $2,468 $2,368 $2,292 $2,008 $9,136 Financial Services (EBT) 50 53 (35) (4) 64 Total EBIT 2,518 2,421 2,257 2,004 9,200 Communications Services EBIT includes: Wireless Services 92 122 151 235 600 Communications Services EBIT also includes approximate amounts for new initiatives (Dollars in billions): Local Services (0.1) (0.1) (0.1) (0.2) (0.5) Wireless Initiatives 0.0 0.0 (0.1) 0.0 (0.1) Other Initiatives $(0.2) $(0.3) $(0.3) $(0.2) $(1.0) (Continued) AT&T Form 10-Q - Part II AT&T Quarterly Data (Dollars in millions except per share amounts) (Unaudited) Year For the Three Months Ended Ended Mar. 31, June 30, Sep. 30, Dec. 31, Dec. 31, 1996 1996 1996 1996 1996 EBITDA Total Communications Services $3,138 $3,039 $3,052 $2,709 $11,938 Financial Services (EBT) 50 53 (35) (4) 64 Total EBITDA 3,188 3,092 3,017 2,705 12,002 Communications Services EBITDA includes: Wireless Services 267 302 334 429 1,332 Communications Services EBITDA also includes approximate amounts for new initiatives (Dollars in billions): Local Services $ (0.1) $ (0.1) $ (0.1) $ (0.2) $ (0.5) Wireless Initiatives 0.0 0.0 (0.1) 0.0 (0.1) Other Initiatives $ (0.2) $ (0.3) $ (0.2) $ (0.2) $ (0.9) Approximate Earnings Per Share: Total AT&T $ 0.92 $ 0.95 $ 0.84 $ 0.76 $ 3.47 New Initiatives $(0.10) $(0.16) $(0.17) $(0.16) $(0.59) Core $ 1.02 $ 1.11 $ 1.01 $ 0.92 $ 4.06 All financial data presented on a "core" and "initiatives" basis should be considered approximate. Data on initiatives include costs and expenses on an incremental basis, and require certain estimates and allocations that management believes provide a reasonable basis on which to present such information. AT&T Form 10-Q - Part II Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number 12 Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule (b) Reports on Form 8-K: Form 8-K dated January 15, 1997 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits). Form 8-K dated March 3, 1997 was filed pursuant to Item 5 and Item 7. AT&T Form 10-Q 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. Date May 12, 1997 /s/ M. B. Tart ----------------------------- M. B. Tart Vice President and Controller (Principal Accounting Officer) AT&T Form 10-Q Exhibit Index Exhibit Number 12 Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule EX-12 2 EXHIBIT 12 Exhibit 12 Form 10-Q For the Three Months Ended March 31, 1997 AT&T Corp. Computation of Ratio of Earnings to Fixed Charges (Dollars in Millions) (Unaudited) For the Three Months Ended March 31, 1997 Income from Continuing Operations Before Income Taxes ................................. $1,811 Less Interest Capitalized during the Period........................................... 62 Add Equity Investment Losses, net of distributions of Less than 50% Owned Affiliates.................. 13 Add Fixed Charges...................................... 266 Total Earnings from Continuing Operations Before Income Taxes and Fixed Charges.................................... $2,028 Fixed Charges Total Interest Expense Including Capitalized Interest.. $ 185 Interest Portion of Rental Expense..................... 81 Total Fixed Charges................................ $ 266 Ratio of Earnings to Fixed Charges..................... 7.6 EX-27 3 FDS --
5 This schedule contains summary financial information extracted from the unaudited 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-31-1996 JAN-01-1997 MAR-31-1997 415 0 9,719 999 0 17,459 39,595 20,233 54,691 14,692 7,867 0 0 1,624 19,242 54,691 0 13,048 0 11,358 0 667 49 1,811 689 1,122 4 0 0 1,126 0.69 0
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