Management's Discussion and Analysis
1996 was a historic year for AT&T as we successfully separated into three
independent entities.
In 1996 we successfully completed our plan to separate into three publicly
held stand-alone companies, each focused on serving certain core businesses.
This began with the initial public offering (IPO) of 17.6% of Lucent
Technologies Inc. (Lucent) shares in April 1996, the largest IPO in history. We
distributed to our shareowners all of the shares we owned of Lucent on September
30, 1996. On October 1, 1996, we completed the sale of our majority interest in
AT&T Capital Corporation (AT&T Capital) and we received $1.8 billion in cash.
Finally, on December 31, 1996 we completed our plan when we distributed to our
shareowners all of our shares in NCR Corporation (NCR).
The actions taken in 1996 leave us in a strong position for the future. Our
debt ratio, excluding financial services, at the end of 1996 was 18.7%, among
the lowest in our industry. Our return on average assets from continuing
operations was approximately 10.3%, among the highest in our industry.
We made significant expenditures in 1996 for strategic investments into
various markets which we believe complement our core business. These include
internet access, consulting and outsourcing and local expansion. In 1996 we
continued our market share leadership in the consumer and business long distance
markets.
We continued to provide new products and services to our customers, such as
our AT&T One Rate program, a flat 15-cents-a-minute plan for consumers.
Announced at the end of September, the program already had nearly 3 million
subscribers at the end of December. Although the majority of One Rate customers
are existing AT&T customers moving from other calling plans, One Rate has
attracted a number of wins from competitors. Success in the telecommunications
market is about meeting complex customer needs and providing valuable and
reliable services. We are committed to meeting these needs by providing the
necessary service plans and by maintaining the AT&T long distance network which
has unparalleled reliability by almost any measure.
We continued to expand our relationship with our business customers from
one of simply carrying voice and data traffic playing a consultative role and
becoming strategic partners. We now provide business consulting, outsourcing and
electronic commerce solutions among other services to business markets. For
example, we signed a $1.1 billion, ten-year contract with Textron, Inc. to
upgrade, expand and manage their global communications infrastructure.
As a result of the strategic restructuring, some changes in our financial
reporting format have been made. In order to appropriately reflect the ongoing
operations of the "new" AT&T, certain reclassifications have been made to
reflect the results of businesses that we have divested or plan to divest.
Accordingly, the revenues and expenses, assets and liabilities and cash flows of
Lucent, NCR and AT&T Capital, as well as certain other businesses, have been
excluded from the respective captions in the Consolidated Statements of Income,
Consolidated Balance Sheets and Consolidated Statements of Cash Flows. The net
operating results of these businesses have been reported as "Income (loss) from
discontinued operations," net of applicable income taxes, the net assets as "Net
assets of discontinued operations" and the net cash flows as "Net cash used in
discontinued operations." In addition, the consolidated results for continuing
operations have been reclassified to improve comparability with the
communications services industry. As a result of the spin-offs of Lucent and NCR
and the sale of AT&T Capital, our Consolidated Balance Sheet at December 31,
1996 no longer includes these entities in "Net assets of discontinued
operations." Additionally, the results of operations and net cash flows for
Lucent and AT&T Capital are reflected in our Consolidated Statements of Income
and Consolidated Statements of Cash Flows through the date these dispositions
occurred.
Restructuring and Other Charges
In the fourth quarter of 1995 we recorded a pretax charge of $3,029 million
for restructuring costs of $2,307 million and asset impairments and other
charges of $722 million. The charges covered consolidating and reorganizing
numerous corporate and business unit operations over several years. The total
pretax charge was recorded as $844 million in network and other communications
services, $934 million in depreciation and amortization, $1,245 million in
selling, general and administrative and $6 million in financial services
expenses. The tax benefit associated with the charges was $993 million.
During 1996 we continued to implement our restructuring plans. We completed
the restructuring of our proprietary network and messaging services business,
closed several call servicing centers, sold certain international operations,
and reorganized and reduced certain corporate support functions. As of December
31, 1996, approximately 5,000 management employees and 1,000 occupational
employees have been separated. Of the 5,000 management separations,
approximately 3,000 accepted voluntary separation packages. We expect the
majority of our plans to be completed during 1997. However, certain severance
and facility costs have payment terms extending beyond 1997. A detailed
discussion of restructuring and other charges is in Note 5 to the Consolidated
Financial Statements.
AT&T operates in two industry segments, the telecommunications industry and
the financial services industry. Our communications services (which is part of
the telecommunications industry) consists of a wide range of services to
residential and business customers, including domestic and international
wireline long distance voice, data and video services, wireless services,
network management, business consulting, outsourcing, electronic commerce
solutions and internet access service. Our financial services segment primarily
consists of our AT&T Universal Card credit card business.
COMMUNICATIONS SERVICES
Communications services revenues grew 4.4% in 1996 and 5.4% in 1995.
Dollars in millions 1996 1995 1994
Revenues
Wireline $45,647 $44,226 $42,320
Wireless 3,476 2,926 2,280
Products and other services 1,392 1,251 1,338
Total communications services
revenues $50,515 $48,403 $45,938
Operating income $ 8,746 $5,159 $ 7,370
Operating margin 17.3% 10.7% 16.0%
Wireline services revenue, which includes traditional long distance toll
calling, network management, messaging and other network-enabled services,
increased 3.2% in 1996 and 4.5% in 1995. We handled a record 68 billion calls in
1996, causing conversation minutes for switched long distance services (volume)
to rise 5.9%. The volume growth in 1996 slowed from the nearly 9.0% growth
registered in 1995, reflecting competitive pressures from traditional sources in
the consumer markets as well as nontraditional sources such as smaller
telecommunications companies and dial-around resellers. This pressure was
somewhat offset by strong volume growth in business inbound services,
particularly toll-free 800 and 888 services.
Volume growth continued to exceed revenue growth in 1996. This reflected
lower pricing from promotional discounts, increased movement of customers to
optimal calling plans and increased discounts given to large accounts. As we
continued to expand internationally, international volumes increased while
related revenue remained relatively flat.
In 1995 we saw volume growth in calling card, business inbound services and
consumer international services. Although volume growth exceeded revenue growth
(due primarily to customers taking advantage of our calling plans and
promotions), the gap between revenues and volumes was about 4% in 1995. This
reflected movement among calling plans by both business and residential
customers and some targeted price increases.
The long distance market is increasingly characterized by aggressive
pricing actions, the introduction of new competitors (such as dial-around
resellers) and price sensitivity on the part of consumers. As a result, revenue
as well as volume growth was adversely impacted. We expect that these conditions
will intensify in the future as the Regional Bell Operating Companies (RBOCs)
are permitted to provide long distance services in their home regions, thereby
negatively impacting our long distance volume and revenue. As the RBOCs, who
currently have zero market share, begin providing long distance services, we
will lose long distance market share. However, we will gain market share in the
local telephone service market as we are able to enter it.
Wireless services revenue, which includes cellular, messaging services, and
air-to-ground services, grew 18.8% in 1996 and 28.3% in 1995. The growth in both
periods was the result of consolidated cellular subscriber growth of 31.7% in
1996 and 39.2% in 1995.
Cellular customers, reported on the same basis as consolidated wireless
revenues, stood at 5.2 million at December 31, 1996 compared with 3.9 million at
December 31, 1995 and 2.8 million at December 31, 1994. Cellular customers
served by companies in which we have or share a controlling interest increased
to 7.1 million at December 31, 1996 from 5.5 million at December 31, 1995 and
4.0 million at December 31, 1994. Cellular revenue per subscriber was
approximately $60 per month in 1996 compared with approximately $69 in 1995 and
approximately $79 in 1994. The decline reflected industry wide pricing
pressures, as well as lower average usage per subscriber as expansion included
growth in subscribers who are more casual users (e.g. for emergency and other
personal use). However, based on reported financial information of wireless
competitors, our revenue per subscriber is above the industry average. The
number of casual users is expected to continue to grow in 1997, which will
likely result in lower average revenue per subscriber next year.
By combining our 800 MHZ cellular and 1900 MHZ personal communications
services (PCS) licenses, we can eventually provide wireless telecommunication
services to markets covering approximately 93% of the U.S. population. In
October 1996 we launched AT&T Digital PCS service in more than 40 of our
existing 800 MHZ wireless markets, covering 70 million potential customers. The
difference between AT&T Digital PCS and analog cellular service is in the
features. AT&T Digital PCS provides longer battery life, short text messaging
service, caller identification, message waiting indicator and enhanced security.
AT&T Digital PCS allows customers to make and receive voice and data
transmissions to people rather than places. At December 31, 1996, we had more
than 900,000 digital subscribers, including over 500,000 receiving AT&T Digital
PCS service.
The overall penetration rate (number of cellular customers as a percentage
of the total population in the service territory) for markets in which we have
or share a controlling interest increased from 5.9% at December 31, 1995 to 7.5%
at December 31, 1996.
Products and other services revenue includes wireless product sales, online
services, consulting and outsourcing services, and other sales and services to
businesses and consumers. Products and other services revenue increased 11.2% in
1996 and decreased 6.5% in 1995. The roll-out of new and nontraditional services
drove the increase in 1996. The 1995 decrease was mainly due to lower other
services in our wireless business.
During 1996 we began offering internet access service under AT&T
WorldNet(sm) and had 568,000 subscribers by the end of the year. Our AT&T
WorldNet(sm) and hosting services and our consulting and outsourcing businesses
contributed to the increase in revenues. However, these start-up businesses
required significant expenditures in both years. These investments are necessary
for us to expand into the strategic areas we believe are important to our
future.
We signed numerous agreements in 1996 to provide consulting and outsourcing
services to various companies. We expect these agreements to increase products
and other services revenue in 1997. Revenue expected under contracts executed in
1996 primarily for outsourcing amounted to approximately $2.9 billion at
December 31, 1996. This is earned over the contract term, which can extend to up
to 10 years. Since revenue depends on actual usage under service contracts,
actual revenue for a particular contract may be higher or lower than the
reported expected amount.
Operating Expenses
Operating expenses for communications services included $3,023 million of
restructuring and other charges in 1995 and $246 million of McCaw Cellular
Communications, Inc. (McCaw) merger-related expenses in 1994. Excluding these
charges, operating expenses for communications services increased 3.9% in 1996
and 5.0% in 1995. The 1996 growth was due to increased selling, general and
administrative expenses and increased network and other communications services
expenses partially offset by decreased access and other interconnection
expenses. The 1995 growth was primarily due to increased selling, general and
administrative expenses. The expense growth rate decreased in 1996 primarily due
to lower access and other interconnection charges. As a result, the operating
margin for communications services increased in 1996 to 17.3% from 16.9% in
1995, excluding restructuring and other charges, and 16.6% in 1994.
Access and other interconnection expenses are the charges for facilities
provided by local exchange carriers and other domestic service providers and
fees paid to foreign telephone companies (international settlements) to connect
calls made to or 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 their network. These costs
declined in both 1996 and 1995 due to lower per-minute access cost resulting
from changes in the price setting methodology approved by the Federal
Communications Commission (FCC), operational improvements in our infrastructure
and reduced international settlements. The decrease in 1996 was also partially
due to a second quarter accounting adjustment of previously estimated accruals
to reflect actual billing. These reductions were partially offset by increased
volumes and international traffic mix. Access and other interconnection expenses
as a percentage of wireline services revenue were 35.8% in 1996, 39.8% in 1995
and 42.1% in 1994.
Network and other communications services expenses include operating and
maintaining our network, operator services, nonincome taxes and the provision
for uncollectible receivables. Network and other communications services
expenses, excluding $844 million in 1995 related to restructuring and other
charges, increased in both 1996 and 1995 due to increased costs from our
expansion into new initiatives, enhancements made in customer care facilities
and higher provisions for uncollectibles.
New initiatives such as AT&T WorldNet(sm) and hosting services, preparing
for local service entry and our consulting and outsourcing businesses
represented approximately half of the increase in network and other
communications services expenses in 1996 and most of the increase in 1995. We
filed to offer local service in all 50 states less than three weeks after the
Telecommunications Act of 1996 (the Telecommunications Act) was signed in
February 1996. As of December 31, 1996, we had received authority to provide
local service in 42 states.
The higher provision for uncollectibles in 1996 reflects collection issues
as well as a shift in industry wide credit risk profiles of business customers
which resulted in increased bankruptcies, delinquencies and fraud. In particular
the business reseller market has experienced significant competition which has
had a negative impact on these customers' payment patterns. Our ongoing
provision for uncollectibles will continue to reflect the increased risk in our
business markets.
In 1996 the cost of operating our worldwide intelligent network was
essentially unchanged despite increased calling volumes and the increased
complexity of our service offerings.
Depreciation and amortization expenses, excluding $934 million of
restructuring and other charges in 1995, increased $154 million or 6.0% in 1996.
This increase was primarily the result of additions to the telecommunications
network and was partially offset by the impact of the asset write-downs at the
end of 1995. We expect depreciation and amortization expense to continue to
increase with the expansion of our networks. (See Financial Condition and Cash
Flows - Investing activities for a discussion of capital expenditures.)
Additionally, subsequent to their divestment, purchases from Lucent and NCR
are recorded at the full commercial price. When these entities were part of our
consolidated results, these purchases were reflected at their manufacturing
costs. Going forward, this will result in higher capital expenditures and
related depreciation expense as well as higher period expenses for those items
not capitalized. We have committed to purchase $3,000 million from Lucent by the
end of 1998 and $350 million from NCR by the end of 1999. By the end of 1996 we
had purchased $2,726 million from Lucent and NCR under these agreements.
In 1995 depreciation and amortization expenses increased $192 million or
8.0%, excluding restructuring and other charges, due to increased capital
expenditures to support our telecommunications network services, to provide for
growth in calling volumes, to introduce new technology and to enhance
reliability. Also contributing to the increase was amortization associated with
the acquisition of the remaining interest in LIN Broadcasting Corporation (LIN)
in October 1995.
Selling, general and administrative expenses, excluding $1,245 million of
restructuring and other charges in 1995 and $246 million of McCaw merger-related
expenses in 1994, were 29.3% of communications services revenues in 1996, 27.1%
in 1995 and 24.8% in 1994. These costs increased as a percentage of
communications services revenues in both 1996 and 1995 due to expenditures for
new initiatives, higher marketing and sales expenses and enhancements to
customer care facilities.
Our initiatives for online services, such as AT&T WorldNet(sm), local
expansion and our consulting and outsourcing businesses represented about 30% of
our increase in 1996 and approximately 15% of our increase in 1995.
These increases were slightly offset in 1996 by lower costs per point for
our True Rewards program as well as the expiration of some True Rewards points.
Additionally, further offsetting the 1996 increase were cost reduction benefits
obtained from the 1995 restructuring.
Also included in selling, general and administrative expenses were $640
million, $563 million and $463 million of research and development expenses in
1996, 1995 and 1994, respectively. Research and development expenditures are
mainly for work on wireless technology, advanced communications services and
projects aimed at international growth. These expenses included $6 million of
restructuring and other charges in 1995.
Financial Services
Dollars in millions 1996 1995 1994
Revenues (1) $ 1,669 $ 2,261 $ 1,838
Operating income 64 294 216
Operating margin 3.8% 13.0% 11.8%
Universal Card Information:
Total owned finance receivables $ 7,056 $10,618 $12,380
Total owned and managed
finance receivables 13,556 14,118 12,380
Cardholder accounts in millions 18.3 17.6 15.1
(1) Reflects revenues from owned receivables only. Owned receivables as a
percentage of total owned and managed receivables were 52% in 1996 and 75% in
1995.
Our financial services segment is primarily our AT&T Universal Card
Services business. Contributing to a lesser degree are some finance assets that
we retained from AT&T Capital as a result of their 1993 restructuring. Universal
Card continued to experience competitive pricing pressures and higher
charge-offs in 1996, as did the industry. The reserve for credit losses is set
based on experience, current delinquencies and the outlook for the economy.
Revenues have decreased in 1996 compared with 1995 primarily due to the impact
of securitizations we completed during 1995 and 1996. Additionally, lower rate
offers continued to decrease margins. In 1995 revenues increased due to a higher
level of average owned receivables. Universal Card's total managed receivables
included $6,500 million and $3,500 million of cumulative securitized receivables
at the end of 1996 and 1995, respectively. Universal Card retains the servicing
and customer relationships of the credit card accounts that were securitized.
Financial services expenses decreased $356 million or 18.2% in 1996, excluding
$6 million in 1995 for restructuring and other charges. This decrease reflects a
decrease in overall direct portfolio expenses (interest, provisions for credit
losses and other related costs) due to decreased owned receivables primarily
associated with the securitization program. Selling, general and administrative
expenses increased $83 million primarily due to customer loyalty programs.
Financial services operating income decreased $236 million in 1996, and
increased $84 million in 1995, excluding restructuring and other charges.
Operating margin was 3.8% in 1996, 13.3% in 1995 and 11.8% in 1994. The decrease
in 1996 was primarily due to the continued declinein portfolio credit
performance and increased selling, general and administrative expenses. The
increase in 1995 was due to a higher level of average earning assets.
Other Income Statement Line Items
Other income - net includes sales and exchanges of cellular properties, net
equity earnings from investments, increases in the value of corporate-owned life
insurance policies on officers, minority owners' interests in the earnings or
losses of subsidiaries and other miscellaneous transactions.
In addition to the above, other income for 1996 included a loss on our
investment in Novell, Inc. stock and other income for 1994 included the loss
from a lost satellite and preferred dividends of a subsidiary.
Interest expense decreased in 1996 compared with 1995 due to lower levels
of average debt. The lower levels of average debt are primarily attributable to
the assignment of debt to Lucent and the application of the proceeds from the
sale of AT&T Capital. Interest expense in 1995 compared with 1994 increased as a
result of higher levels of average debt offset partially by lower average rates
on long-term debt.
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 for 1996 of 36.7% was impacted by tax benefits
associated with various legal entity restructurings. The 1995 effective income
tax rate of 39.0% was impacted by the restructuring and other charges. Excluding
such charges, our 1995 effective income tax rate was 36.7% which was favorably
impacted by lower state tax rates and higher research credits. The 1994
effective income tax rate of 39.3% was impacted by McCaw merger-related expenses
as well as a tax benefit of $74 million as a result of the redemption of a
subsidiary's preferred stock. Excluding these charges, our effective income tax
rate for 1994 was 38.8%.
Income from discontinued operations was $138 million in 1996, $251 million
in 1995 excluding restructuring and other charges of $3,317 million, and $317
million in 1994. Income from discontinued operations includes the results of NCR
and other businesses, and the results of Lucent and AT&T Capital through
September 30, 1996. As a result, the decline in 1996 relates primarily to Lucent
and AT&T Capital being included for only a portion of the year. Discontinued
operations also includes the elimination of intercompany transactions, an
allocation of AT&T's interest expense (based on a ratio of net assets of
discontinued operations to total AT&T consolidated assets), and a portion of
AT&T's consolidated taxes attributable to discontinued businesses. We recognized
a $162 million after-tax gain on the sale of AT&T Capital as a separate
component of discontinued operations in 1996. Included in 1996 income from
discontinued operations in 1996.
Included in 1996 income from discontinued operations is a nonrecurring tax
benefit of $155 million as a result of reversing deferred tax liabilities on the
earnings of Lucent's non-U.S. consolidated subsidiaries. The subsidiaries have
the ability and specific intention to permanently reinvest such undistributed
earnings. These deferred tax liabilities reduced income from discontinued
operations in earlier years.
Financial Condition and Cash Flows
Operating activities. Cash flow from operating activities decreased 3.6% to
$8,734 million in 1996 and increased 14.0% to $9,060 million in 1995. The
decrease in 1996 related to required cash payments for restructuring and other
charges amounting to $471 million. We expect that another $1.4 billion will
require future cash payments. The increase in 1995 was consistent with the
growth in our income from continuing operations, excluding restructuring and
other charges.
EBITDA (earnings before interest, taxes, depreciation and amortization) for
our communications services business was $11,938 million in 1996, $11,098
million in 1995 (excluding restructuring and other charges) and $10,138 million
in 1994 (excluding merger-related expenses). The increase in EBITDA in both 1996
and 1995 relates to a higher level of revenues and lower access and
interconnection expenses. EBITDA is a measure of our ability to generate cash
flows, 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.
Investing activities. We used $1,490 million in 1996, $8,987 million in 1995 and
$7,276 million in 1994 for investing activities. Included in 1996 investing
activities were net capital expenditures, proceeds received from securitizations
and proceeds received from divestments, including the sale of AT&T Capital.
Capital expenditures (primarily associated with our network and wireless
infrastructure), acquisitions of businesses and investments and the acquisitions
of PCS and cellular licenses were approximately $7.3 billion in 1996, $10.0
billion in 1995 and $3.9 billion in 1994. This resulted in net cash outlays for
the foregoing in each of 1996, 1995 and 1994 of approximately $6.9 billion,
$10.1 billion and $3.8 billion, respectively.
In 1996 we continued to invest in our communications network in order to
increase capacity, reliability and enhance network intelligence to provide new
products and services. This included the continued deployment of Synchronous
Optical Network Technology (SONET) for our long distance network, as well as
SONET rings which provide millisecond restoration of traffic in the event of a
fiber cut. We also invested in switching system software associated with
advanced call features. Further, we expanded our wireless infrastructure to
provide higher capacity and improve service quality. Substantial investments in
our communications services business are expected to continue as we upgrade our
network and invest in new markets.
Competition in communications is global and increasingly involves
multinational firms and partners. We believe commitments of resources to expand
globally are necessary for future growth. For example, we have established a
presence in the United Kingdom to compete directly with the dominant national
provider.
Also contributing to investing activities is our financial services
business. Securitizations of credit card receivables brought in cash of $3.0
billion in 1996 and $3.5 billion in 1995. Securitization may continue to be used
as a financing alternative in the future.
Financing activities. Cash used for financing activities was $5,381 million in
1996 and $222 million in 1994. In 1995 financing activities provided cash of
$1,420 million. AT&T has raised all necessary external financing through
issuances of commercial paper and long-term debt, as well as asset-backed
securities (the Universal Card securitizations) and equity. We expect to be able
to arrange any necessary future financing using these same sources, with the
timing of issue, principal amount and form depending on our needs and the
prevailing market and economic conditions.
During 1996 we retired long-term debt of $1,236 million and decreased
short-term debt by $5,302 million. The changes in debt reflect the use of
alternative sources of funding, such as securitizations, as well as the impact
of Lucent obtaining its own external financing in 1996. Additionally, the cash
collection of the $2.0 billion in accounts receivable retained by AT&T
continuing operations as part of the restructuring plan and the proceeds of $1.8
billion from the sale of AT&T Capital were used to pay down our debt.
In 1995 we retired $2,137 million of long-term debt, but borrowed an
additional $2,392 million of long-term debt and $1,939 million of short-term
debt. In 1994 we retired $4,078 million in long-term debt and borrowed $3,422
million of long-term debt and $1,217 million of short-term debt.
In each of the past three years, we issued new shares of common stock in
our shareowner and employee benefit stock-ownership plans. In 1997 stock used in
our shareowner and employee benefit stock-ownership plans will now be purchased
in the stock market instead of using unissued or treasury shares. This will
minimize the dilutive effects of these plans on equity shareowners, but will
require us to use cash to purchase the shares. We also paid dividends of $2,122
million in 1996, $2,088 million in 1995 and $1,870 million in 1994.
On a limited basis, we use certain derivative financial instruments in an
effort to manage exposure to interest rate risk and foreign exchange risk. Our
utilization of these instruments is limited to interest rate swap agreements,
forward contracts and options in foreign currencies to hedge exposures. We do
not enter into such instruments for speculative purposes. All hedging activity
is in accordance with board-approved policies. Any potential loss or exposure
related to our use of derivative instruments is immaterial to our overall
operations, financial condition and liquidity. The notional amounts of
derivative contracts do not represent direct credit exposure or future cash
requirements. Credit exposure is determined by the market value of derivative
contracts that are in a gain position as well as the ability of the counterparty
to perform its payment obligations under the agreements. We control credit risk
of our derivative contracts through credit approvals, exposure limits and other
monitoring procedures. There were no past due amounts related to our derivative
contracts at December 31, 1996, nor have we ever recorded any charge-offs
related to derivative contracts.
Total assets decreased from the end of 1995 primarily due to lower net
assets of discontinued operations, finance receivables and current deferred
income taxes. The decrease in net assets of discontinued operations is primarily
due to the dispositions of Lucent, NCR and AT&T Capital in 1996. Finance
receivables decreased mainly due to the Universal Card securitizations. The
decrease in current deferred income tax assets is partially offset by the
decrease in long-term deferred income tax liabilities. These decreases reflect
the portion of long-term deferred income tax liabilities at year-end 1995 that
became current in 1996.
The decreases in assets were partially offset by increases in property,
plant and equipment and accounts receivable. The increase in property, plant and
equipment was primarily due to capital expenditures for the AT&T network and
wireless infrastructure. The increased accounts receivable was driven by our
increased revenues.
Total liabilities decreased from December 31, 1995 primarily due to lower
short- and long-term debt, deferred income taxes and other long-term liabilities
and deferred credits. The lower levels of debt are primarily attributable to the
Universal Card securitization program, the assignment of debt to Lucent, and the
application of the cash received from the $2.0 billion in retained receivables
from Lucent and the proceeds from the sale of AT&T Capital. Long-term deferred
income tax liabilities declined due to the reclassification of deferred income
taxes to current as discussed above. Other long-term liabilities and deferred
credits were down primarily due to certain restructuring-related liabilities
becoming current.
These decreases were offset by increases in accounts payable and other
current liabilities. Increased accounts payable relate to increased capital
expenditures, higher international settlement payables due to timing of payments
and payables related to increased marketing and sales efforts. Increased current
liabilities reflect increased current taxes payable due primarily
to the sale of
AT&T Capital.
Shareowners' equity was $20,295 million at December 31, 1996 and $17,274
million at December 31, 1995. The increase is due primarily to net income and
shares issued under employee plans offset primarily by the impact of the Lucent
and NCR spin-offs of approximately $2.2 billion and dividends of $2.1 billion.
The ratio of total debt to total capital (debt plus equity) decreased to
33.8% at December 31, 1996, compared with 54.5% at December 31, 1995. Most of
our debt supports financial services operations. Excluding financial services,
our debt ratio was 18.7% at the end of 1996 and 41.3% at the end of 1995. In
1996 we reduced our debt levels significantly as discussed above. The 1995 ratio
was higher because of the restructuring and other charges and by the issuance of
additional debt to finance the acquisitions of PCS licenses and the remaining
48% of LIN. Additionally, we had approximately $6.0 billion of unused available
lines of credit at December 31, 1996.
The fair value of our pension plan assets is greater than our projected
pension obligations. We record pension income when our expected return on plan
assets plus the amortization of the transition asset (created by our 1986
adoption of the current standard for pension accounting) is greater than the
interest cost on our projected benefit obligation plus service cost for the
year. Consequently we continued to have pension income that added to our prepaid
pension asset in 1996.
Legislative Developments, Regulatory Developments and Competition
In February 1996 the Telecommunications Act became law. The
Telecommunications Act, among other things, was designed to foster local
exchange competition by establishing a regulatory framework to govern new
competitive entry in local and long distance telecommunications services. The
Telecommunications Act permits 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.
In August 1996 the FCC adopted rules and regulations (the Implementing
Rules) to implement the local competition provisions of the Telecommunications
Act. The Implementing Rules rely on each state to develop the specific rates and
procedures in such state within the framework prescribed by the FCC for
developing such rates and procedures. In October 1996 the United States Court of
Appeals for the 8th circuit ordered a stay of the effectiveness of certain of
the Implementing Rules until such court resolves challenges thereto by local
telephone companies and telephone regulators in several states.
We believe that such stay may inhibit the establishment of appropriate
permanent rates for the provision of network elements and wholesale services.
Absent full effectiveness of the stayed Implementing Rules, each state will
determine the applicable rates and procedures independent of the framework of
the Implementing Rules. Since the stay was issued, many states have used the
Implementing Rules as guidelines in establishing interim rates that will apply
pending the determination of permanent rates in subsequent state proceedings.
Nevertheless, in the absence of the Implementing Rules, 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 us with new
market opportunities.
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 our entrance into the local exchange services
market and our ability to offer combined service packages that include local
service. 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 our future revenues and
earnings. In addition, the simultaneous entrance of numerous new competitors for
interexchange and combined service packages is likely to adversely affect our
long distance revenues and could adversely affect earnings.
We currently face significant competition in the communications services
industry and expect that the level of competition will continue to increase. The
Telecommunications Act has already begun to intensify the competitive
environment in recent months. Non-RBOC local exchange carriers, which are not
required to implement the Telecommunications Act competitive checklist prior to
offering long distance in their home markets, anticipating changes in the
industry, 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. In addition, most of the RBOCs have
indicated their intention to petition the FCC during 1997 for permission to
offer interexchange services in one or more states within their home regions.
Recent Pronouncements
In June 1996 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This statement
requires that liabilities incurred or obtained by transferors as part of a
transfer of financial assets be initially measured at fair value, if practical.
It also requires that servicing assets and other retained interests in
transferred assets be recognized and measured by allocating the previous
carrying amount between assets sold and retained interests based upon their
relative fair values at the date of transfer. The statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and early adoption is prohibited. The
adoption of this standard will not have a material impact on our consolidated
financial statements.
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 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 review 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.
SIX-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(UNAUDITED)
AT&T Corp. and Subsidiaries
Dollars in millions (except per share amounts)
1996 1995* 1994 1993* 1992 1991*
- ------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Total revenues $52,184 $50,664 $47,776 $45,002 $43,784 $42,309
Operating income 8,810 5,453 7,586 6,675 6,278 2,503
Income from continuing
operations before cumulative
effects of accounting changes 5,608 3,205 4,393 3,882 3,253 1,083
Income before cumulative
effects of accounting changes 5,908 139 4,710 3,702 3,442 171
Net income (loss) 5,908 139 4,710 (5,906) 3,442 171
Earnings per common share:
Income from continuing
operations before cumulative
effects of accounting changes 3.47 2.01 2.81 2.51 2.14 0.73
Income before cumulative
effects of accounting changes 3.66 0.09 3.01 2.39 2.27 0.12
Net income (loss) 3.66 0.09 3.01 (3.82) 2.27 0.12
Dividends declared per
common share 1.32 1.32 1.32 1.32 1.32 1.32
ASSETS AND CAPITAL
Property, plant and
equipment - net $19,794 $16,083 $14,470 $13,699 $13,638 $13,096
Total assets -
continuing operations 55,026 54,969 48,578 42,217 41,239 37,450
Total assets 55,552 62,395 57,448 50,181 50,632 48,781
Long-term debt 7,883 8,542 8,934 10,287 12,210 12,167
SIX-YEAR SUMMARY OF SELECTED FINANCIAL DATA (Cont'd)
(UNAUDITED)
AT&T Corp. and Subsidiaries
Dollars in millions (except per share amounts)
1996 1995* 1994 1993* 1992 1991*
- ------------------------------------------------------------------------------------------------
Total debt 10,343 20,718 18,533 18,191 17,122 16,756
Shareowners' equity 20,295 17,274 17,921 13,374 20,313 17,973
Gross capital expenditures 6,785 4,522 3,370 2,554 2,319 2,435
Employees -
continuing operations 130,400 128,400 119,100 121,900 122,000 119,100
OTHER INFORMATION
Operating income as a
percentage of revenues 16.9% 10.8% 15.9% 14.8% 14.3% 5.9%
Income from continuing
operations as a percentage
of revenues 10.7% 6.3% 9.2% 8.6% 7.4% 2.6%
Return on average common
equity 28.0% 0.7% 29.5% (47.1)% 17.6% 0.9%
Data at year-end:
Stock price per share** $41.31 $44.40 $34.46 $36.00 $34.97 $26.83
Book value per common share $12.50 $10.82 $11.42 $ 8.65 $13.31 $12.05
Debt ratio 33.8% 54.5% 50.8% 57.6% 45.7% 48.2%
Debt ratio excluding
financial services 18.7% 41.3% 30.0% 43.0% 36.5% 42.9%
- ------------------------------------------------------------------------------------------------
<FN>
*1995 continuing operations data reflect $3.0 billion of pretax business
restructuring and other charges.
1993 net income reflects a $9.6 billion net charge for three accounting
changes.
1991 continuing operations data reflect $3.5 billion of pretax business
restructuring and other charges. **Stock prices have been restated to reflect
the spin-offs of Lucent and NCR.
</FN>
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and objectivity of
the financial statements and all other financial information included in this
report. Management is also responsible for maintaining a system of internal
controls as a fundamental requirement for the operational and financial
integrity of results.
The financial statements, which reflect the consolidated accounts of AT&T
Corp. and subsidiaries (AT&T) and other financial information shown, were
prepared in conformity with generally accepted accounting principles. Estimates
included in the financial statements were based on judgments of qualified
personnel.
To maintain its system of internal controls, management carefully selects
key personnel and establishes the organizational structure to provide an
appropriate division of responsibility. We believe it is essential to conduct
business affairs in accordance with the highest ethical standards as set forth
in the AT&T Code of Conduct. These guidelines and other informational programs
are designed and used to ensure that policies, standards and managerial
authorities are understood throughout the organization. Our internal auditors
monitor compliance with the system of internal controls by means of an annual
plan of internal audits. On an ongoing basis, the system of internal controls is
reviewed, evaluated and revised as necessary in light of the results of constant
management oversight, internal and independent audits, changes in AT&T's
business and other conditions.
Management believes that the system of internal controls, taken as a whole,
provides reasonable assurance that (1) financial records are adequate and can be
relied upon to permit the preparation of financial statements in conformity with
generally accepted accounting principles and (2) access to assets occurs only in
accordance with management's authorizations. The Audit Committee of the Board of
Directors, which is composed of directors who are not employees, meets
periodically with management, the internal auditors and the independent
accountants to review the manner in which these groups of individuals are
performing their responsibilities and to carry out the Audit Committee's
oversight role with respect to auditing, internal controls and financial
reporting matters. Periodically, both the internal auditors and the independent
accountants meet privately with the Audit Committee. These accountants also have
access to the Audit Committee and its individual members at any time.
The financial statements in this annual report have been audited by Coopers
& Lybrand L.L.P., Independent Accountants. Their audits were conducted in
accordance with generally accepted auditing standards and include an assessment
of the internal control structure and selective tests of transactions. Their
report follows.
Richard W. Miller Robert E. Allen
Senior Executive Vice President, Chairman of the Board,
Chief Financial Officer Chief Executive Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners of AT&T Corp.:
We have audited the consolidated balance sheets of AT&T Corp. and
subsidiaries (AT&T) at December 31, 1996 and 1995, and the related consolidated
statements of income, changes in shareowners' equity and cash flows for the
years ended December 31, 1996, 1995 and 1994. These financial statements are the
responsibility of AT&T's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of AT&T at
December 31, 1996 and 1995, and the consolidated results of their operations and
their cash flows for the years ended December 31, 1996, 1995 and 1994, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
1301 Avenue of the Americas
New York, New York
January 22, 1997
CONSOLIDATED STATEMENTS OF INCOME AT&T CORP. AND SUBSIDIARIES
Years Ended December 31
Dollars in millions (except per share amounts) 1996 1995 1994
Sales and Revenues
Communications services..................... $50,515 $48,403 $45,938
Financial services.......................... 1,669 2,261 1,838
Total revenues.............................. 52,184 50,664 47,776
Operating Expenses
Access and other interconnection............ 16,332 17,618 17,797
Network and other communications services... 7,911 7,750 6,747
Depreciation and amortization............... 2,740 3,520 2,394
Selling, general and administrative......... 14,786 14,356 11,630
Total communications services expenses.... 41,769 43,244 38,568
Financial services expenses................. 1,605 1,967 1,622
Total operating expenses.................... 43,374 45,211 40,190
Operating income............................ 8,810 5,453 7,586
Other income - net.......................... 390 280 89
Interest expense............................ 334 478 435
Income from continuing operations before
income taxes.............................. 8,866 5,255 7,240
Provision for income taxes.................. 3,258 2,050 2,847
Income from continuing operations........... 5,608 3,205 4,393
Discontinued operations
Income(loss) from discontinued operations
(net of tax benefits of $374 in 1996,
$1,254 in 1995 and $39 in 1994)........... 138 (3,066) 317
Gain on sale of discontinued operation
(net of taxes of $138).................... 162 - -
Net income ................................. $ 5,908 $ 139 $ 4,710
Weighted-average common shares and
common share equivalents (millions)....... 1,616 1,592 1,564
Per common share
Income from continuing operations........... $ 3.47 $ 2.01 $ 2.81
Income(loss) from discontinued operations... 0.09 (1.92) 0.20
Gain on sale of discontinued operation...... 0.10 - -
Net income.................................. $ 3.66 $ 0.09 $ 3.01
The notes on pages 34 through 44 are an integral part of the consolidated
financial statements.
CONSOLIDATED BALANCE SHEETS AT&T CORP. AND SUBSIDIARIES
At December 31
Dollars in millions 1996 1995
ASSETS
Cash and cash equivalents................... $ 134 $ 129
Receivables, less allowances of $1,336 and $1,252
Accounts receivable....................... 8,973 8,359
Finance receivables....................... 7,087 10,665
Deferred income taxes....................... 1,413 2,437
Other current assets........................ 703 498
TOTAL CURRENT ASSETS........................ 18,310 22,088
Property, plant and equipment - net......... 19,794 16,083
Licensing costs, net of accumulated
amortization of $913 and $743............. 8,071 8,056
Investments................................. 3,883 3,646
Long-term finance receivables............... 703 768
Prepaid pension costs....................... 1,933 1,793
Other assets................................ 2,332 2,535
Net assets of discontinued operations....... 526 7,426
TOTAL ASSETS................................ $55,552 $62,395
LIABILITIES
Accounts payable............................ $ 6,173 $ 5,089
Payroll and benefit-related liabilities..... 2,635 2,908
Debt maturing within one year............... 2,460 12,176
Dividends payable........................... 536 527
Other current liabilities................... 4,514 3,880
TOTAL CURRENT LIABILITIES................... 16,318 24,580
Long-term debt.............................. 7,883 8,542
Long-term benefit-related liabilities....... 3,037 2,871
Deferred income taxes....................... 4,827 5,446
Other long-term liabilities and deferred
credits 3,192 3,682
TOTAL LIABILITIES........................... 35,257 45,121
SHAREOWNERS' EQUITY
Common shares, par value $1 per share....... 1,623 1,596
Authorized shares: 2,000,000,000
Outstanding shares: 1,623,487,646 at December 31, 1996;
1,596,005,351 at December 31, 1995
Additional paid-in capital.................. 15,643 16,614
Guaranteed ESOP obligation.................. (96) (254)
Foreign currency translation adjustments.... 47 5
Retained earnings (deficit)................. 3,078 (687)
TOTAL SHAREOWNERS' EQUITY................... 20,295 17,274
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY... $55,552 $62,395
The notes on pages 34 through 44 are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREOWNERS' EQUITY AT&T CORP. AND SUBSIDIARIES
Years Ended December 31
Dollars in millions 1996 1995 1994
Common shares
Balance at beginning of year $ 1,596 $ 1,569 $ 1,547
Shares issued:
Under employee plans 19 13 11
Under shareowner plans 8 13 8
Other - 1 3
Balance at end of year 1,623 1,596 1,569
Additional paid-in capital
Balance at beginning of year 16,614 15,825 14,324
Shares issued:
Under employee plans 975 598 536
Under shareowner plans 434 687 424
Other - 31 133
Preferred stock redemption - - 408
Dividends declared - (527) -
Spin-offs of Lucent and NCR(a) (2,380) - -
Balance at end of year 15,643 16,614 15,825
Guaranteed ESOP obligation
Balance at beginning of year (254) (305) (355)
Amortization 52 51 50
Assumption by Lucent(a) 106 - -
Balance at end of year (96) (254) (305)
Foreign currency translation adjustments
Balance at beginning of year 5 145 (32)
Translation adjustments (33) (140) 177
Spin-offs of Lucent and NCR(a) 75 - -
Balance at end of year 47 5 145
Retained earnings (deficit)
Balance at beginning of year (687) 687 (2,110)
Net income 5,908 139 4,710
Dividends declared (2,132) (1,570) (1,940)
Other changes (11) 57 27
Balance at end of year 3,078 (687) 687
Total Shareowners' Equity $20,295 $17,274 $17,921
(a) The net impact of the spin-offs of Lucent and NCR on total shareowners'
equity was $2,199 million.
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. In connection
with the Lucent spin-off, $106 million of the unamortized guaranteed ESOP
obligation was assumed by Lucent.
We have 100 million authorized shares of preferred stock at $1 par value.
No preferred stock is currently issued or outstanding.
The notes on pages 34 through 44 are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS AT&T CORP. AND SUBSIDIARIES
Years Ended December 31
Dollars in millions 1996 1995 1994
OPERATING ACTIVITIES
Net income $ 5,908 $ 139 $ 4,710
Add:(Income)loss from discontinued operations (138) 3,066 (317)
Gain on sale of discontinued operation (162) - -
Income from continuing operations 5,608 3,205 4,393
Adjustments to reconcile net income to net cash provided by
operating activities
of continuing operations:
Restructuring and other charges - 3,029 -
Depreciation and amortization 2,740 2,586 2,394
Provision for uncollectibles 2,443 2,272 1,697
Increase in accounts receivable (2,149) (2,231) (1,857)
Increase in accounts payable 438 850 562
Net (increase)decrease in other operating
assets and liabilities (861) (93) 319
Other adjustments for noncash items - net 515 (558) 436
NET CASH PROVIDED BY OPERATING ACTIVITIES
OF CONTINUING OPERATIONS 8,734 9,060 7,944
INVESTING ACTIVITIES
Capital expenditures (6,339) (4,616) (3,302)
Proceeds from sale or disposal of property,
plant and equipment 145 204 54
Decrease(increase) in finance assets 139 (2,364) (3,537)
Proceeds from securitizations of
finance receivables 3,000 3,492 -
Acquisitions of licenses (267) (1,978) (293)
Net increase in investments (290) (101) (114)
Dispositions(acquisitions), net of
cash acquired 2,145 (3,406) (105)
Other investing activities - net (23) (218) 21
NET CASH USED IN INVESTING ACTIVITIES OF
CONTINUING OPERATIONS (1,490) (8,987) (7,276)
FINANCING ACTIVITIES
Proceeds from long-term debt issuances - 2,392 3,422
Retirements of long-term debt (1,236) (2,137) (4,078)
Issuance of common shares 1,293 1,214 976
Dividends paid (2,122) (2,088) (1,870)
(Decrease)increase in short-term
borrowings - net (5,302) 1,939 1,217
Other financing activities - net 1,986 100 111
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES OF CONTINUING OPERATIONS (5,381) 1,420 (222)
Effect of exchange rate changes on cash 9 40 (6)
Net cash used in discontinued operations (1,867) (1,624) (392)
Net increase(decrease) in cash and
cash equivalents 5 (91) 48
Cash and cash equivalents at
beginning of year 129 220 172
Cash and cash equivalents at
end of year $ 134 $ 129 $ 220
The notes on pages 34 through 44 are an integral part of the consolidated
financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AT&T CORP. AND SUBSIDIARIES (AT&T)
(Dollars in millions, except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include all majority-owned
subsidiaries. Investments in which we exercise significant influence but which
we do not control (generally a 20% - 50% ownership interest) are accounted for
under the equity method of accounting. This represents the majority of our
investments. Generally, investments in which we have less than a 20% ownership
interest are accounted for under the cost method of accounting.
CURRENCY TRANSLATION
For operations outside of the U.S. that prepare financial statements in
currencies other than the U.S. dollar, we translate income statement amounts at
average exchange rates for the year, and we translate assets and liabilities at
year-end exchange rates. We present these translation adjustments as a separate
component of shareowners' equity.
REVENUE RECOGNITION
We recognize wireline and wireless services revenue based upon minutes of
traffic processed and contracted fees. Generally, we recognize products and
other services revenue in accordance with contract terms. Our financial services
revenue is recognized over the life of the finance receivables using the
interest method.
ADVERTISING COSTS
We expense costs of advertising as incurred. Advertising expense was
$2,667, $2,148 and $2,050 in 1996, 1995 and 1994, 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 use the weighted-average number of shares of common shares and common
share equivalents outstanding during each period to compute earnings per common
share. Common share equivalents are stock options assumed to be exercised for
purposes of this computation.
STOCK-BASED COMPENSATION
We apply the intrinsic value based method of accounting for our stock-based
compensation plans, and except for certain plans, we do not record compensation
expense.
CASH EQUIVALENTS
We consider all highly liquid investments with original maturities of
generally three months or less to be cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
We state property, plant and equipment at cost, unless impaired, and
determine depreciation based upon the assets= estimated useful lives using
either the group or unit method. The group method is used for most depreciable
assets. When we sell or retire assets that were depreciated using the group
method, we deduct the cost from property, plant and equipment and accumulated
depreciation. The unit method is used primarily for large computer systems and
undersea submarine cables. When we sell assets that were depreciated using the
unit method, we include the 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 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 5 to
40 years. Goodwill is reviewed for impairment annually or whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows is less
than the carrying amount, a loss is recognized for the difference between the
fair value and carrying value of the asset.
DERIVATIVE FINANCIAL INSTRUMENTS
We use various financial instruments, including derivative financial
instruments, for purposes other than trading. We do not use derivative financial
instruments for speculative purposes. Derivatives, used as part of our risk
management strategy, must be designated at inception as a hedge and measured for
effectiveness both at inception and on an ongoing basis. Gains and losses that
do not qualify as hedges are recognized in other income - net.
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.
RECLASSIFICATIONS
We reclassified certain amounts for previous years to conform with the 1996
presentation.
2. DISCONTINUED OPERATIONS
On September 20, 1995, AT&T announced a plan, subject to certain
conditions, to separate into three independent, publicly held, global companies:
communications services (AT&T), communications systems and technologies (Lucent
Technologies Inc., "Lucent") and transaction-intensive computing (NCR
Corporation, "NCR"). In April 1996 Lucent sold 112 million shares of common
stock in an initial public offering (IPO), representing 17.6% of the Lucent
common stock outstanding. Because of AT&T's plan to spin off its remaining 82.4%
interest in Lucent, the sale of the Lucent stock was recorded as an equity
transaction, resulting in an increase in AT&T's additional paid-in capital at
the time of the IPO. In addition, in connection with the restructuring, Lucent
assumed $3.7 billion of AT&T debt in 1996. On September 30, 1996, AT&T
distributed to AT&T shareowners of record as of September 17, 1996, the
remaining Lucent common stock held by AT&T. The shares were distributed on the
basis of .324084 of a share of Lucent for each AT&T share outstanding.
Also announced as part of the separation plan was AT&T's intent to pursue
the sale of its remaining approximate 86% interest in AT&T Capital Corporation
(AT&T Capital). On October 1, 1996, AT&T sold its remaining interest in AT&T
Capital for approximately $1.8 billion, resulting in a gain of $162, or $.10 per
share, after taxes.
On December 31, 1996, AT&T also distributed all of the outstanding common
stock of NCR to AT&T shareowners of record as of December 13, 1996. The shares
were distributed on the basis of .0625 of a share of NCR for each AT&T share
outstanding on the record date. As a result of the Lucent and NCR distributions,
AT&T's shareowners' equity was reduced by $2.2 billion. The distributions of the
Lucent and NCR common stock to AT&T shareowners were noncash transactions which
did not affect AT&T's results of operations. The distribution of NCR stock
completed AT&T's strategic restructuring plan as announced on September 20,
1995.
The consolidated financial statements of AT&T have been restated to reflect
the dispositions of Lucent, NCR and AT&T Capital and the planned dispositions of
other businesses as discontinued operations. Accordingly, the revenues, costs
and expenses, assets and liabilities, and cash flows of Lucent, NCR, AT&T
Capital 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 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.
Summarized financial information for the discontinued
operations is as
follows:
1996 1995 1994
Revenues $22,341 $28,945 $27,318
Income (loss) before
income taxes (236) (4,320) 278
Net income (loss) 138 (3,066) 317
Current assets 554 17,415
Total assets 862 34,181
Current liabilities 230 14,787
Total liabilities 336 26,755
Net assets of discontinued
operations $ 526 $ 7,426
The income (loss) before income taxes includes allocated interest expense
of $45, $134 and $198 in 1996, 1995 and 1994, respectively. Interest expense was
allocated to discontinued operations based on a ratio of net assets of
discontinued operations to total AT&T consolidated assets.
3. CHANGES IN ACCOUNTING PRINCIPLES
In 1997 we will adopt 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
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. The
adoption of this standard will not have a material impact on our results of
operations, financial position or cash flows.
4. SUPPLEMENTARY FINANCIAL INFORMATION SUPPLEMENTARY INCOME
STATEMENT
INFORMATION
Years ended December 31 1996 1995 1994
INCLUDED IN DEPRECIATION AND AMORTIZATION
Amortization of licensing costs $ 170 $ 133 $ 115
Amortization of goodwill 52 74 38
INCLUDED IN SELLING, GENERAL AND
ADMINISTRATIVE
Research and development expenses $ 640 $ 563 $ 463
FINANCIAL SERVICES EXPENSES
Interest expense $ 392 $ 638 $ 453
Provision for losses 504 663 539
Other costs 410 450 361
Selling, general and administrative 299 216 269
Total $1,605 $1,967 $1,622
OTHER INCOME - NET 1996 1995 1994
Interest income $ 18 $ 38 $ 30
Minority interests in earnings
of subsidiaries (15) (17) (22)
Net equity earnings from investments 67 103 104
Officers' life insurance 74 73 34
Sale/exchange of cellular investments 158 64 12
Miscellaneous - net 88 19 (69)
Total other income - net $ 390 $ 280 $ 89
DEDUCTED FROM INTEREST EXPENSE
Capitalized interest $ 193 $ 107 $ 39
SUPPLEMENTARY BALANCE SHEET INFORMATION
At December 31 1996 1995
PROPERTY, PLANT AND EQUIPMENT
Machinery, electronic and other equipment $32,858 $27,320
Buildings and improvements 6,288 5,973
Land and improvements 376 411
Total property, plant and equipment 39,522 33,704
Accumulated depreciation (19,728) (17,621)
Property, plant and equipment - net $19,794 $16,083
OTHER ASSETS
Unamortized goodwill $ 1,325 $ 1,345
Deferred charges 491 596
Other 516 594
Total other assets $ 2,332 $ 2,535
SUPPLEMENTARY CASH FLOW INFORMATION
Years ended December 31 1996 1995 1994
Interest payments net of
amounts capitalized $ 765 $ 1,049 $ 873
Income tax payments 2,121 2,154 2,136
On September 30, 1996 AT&T distributed to AT&T shareowners all of the
remaining 82.4% of Lucent common stock held by AT&T, resulting in a noncash
distribution of $2.7 billion. Also, on December 31, 1996 AT&T distributed all of
the outstanding stock of NCR to AT&T shareowners, resulting in a noncash
distribution of $2.1 billion.
In 1995 we acquired the remaining 48% of LIN Broadcasting Corporation (LIN)
for approximately $3.3 billion. The purchase price was allocated to the fair
value of assets acquired of $4.0 billion and the fair value of liabilities
assumed of $.7 billion.
5. BUSINESS RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1995 we recorded a pretax charge of $3,029 to
cover restructuring costs of $2,307 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 $1,718 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. Benefit plan losses relate to our pension and other employee
benefit plans and primarily represent losses in the current year for actuarial
changes that otherwise might have been amortized over future periods.
The 1995 restructure charge of $2,307 included separation costs for nearly
17,000 employees, which included approximately 12,000 management and 5,000
occupational employees. As of December 31, 1996, approximately 5,000 management
employees and 1,000 occupational employees have been separated. Of the 5,000
management sepa rations, approximately 3,000 accepted voluntary severance
packages.
During 1996 we completed the restructuring of our proprietary network and
messaging services business, closed several call servicing 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. We expect the majority of our plans
to be completed during 1997. However, certain severance and facility costs have
payment terms extending beyond 1997. We believe that the balance is adequate to
complete these plans.
The following table displays a rollforward of the liabilities for business
restructuring from December 31, 1994 to December 31, 1996:
1995
----------------------
Dec. 31, Dec. 31,
1994 Amounts 1995
Balance Additions Utilized Balance
Type of Cost
Employee separations $ 76 $ 934 $ (79) $ 931
Facility closings 512 497 (248) 761
Other 111 287 8 406
Total $ 699 $1,718 $(319) $2,098
- ---------------------------------------------------------------------------
1996
----------------------
Dec. 31, Dec. 31,
1995 Amounts 1996
Balance Additions Utilized Balance
Type of Cost
Employee separations $ 931 - $(325) $ 606
Facility closings 761 - (233) 528
Other 406 - (152) 254
Total $2,098 - $(710) $1,388
- ---------------------------------------------------------------------------
Utilization primarily represents cash payments and other noncash
utilization of restructuring reserves. 1996 noncash utilization includes $112 of
net transfers to Lucent and NCR.
The December 31, 1994 business restructuring balance included reserves
primarily for real estate and reengineering operator services. As of December
31, 1996, $319 of the $699 December 31, 1994 balance remained. This balance is
primarily related to excess space in various leased facilities and is expected
to be fully utilized over the remaining terms of the leases. The balance is
adequate to complete these plans.
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 nonstrategic
wireless assets and the reduction in value of some investments. There were no
assets to be disposed of or sold included in these write-downs. The charge also
included $54 of other items, none of which individually exceed 1% of the total
charge.
The total pretax charge of $3,029 for 1995 was recorded as $844 in network
and other communications services; $934 in depreciation and amortization; $1,245
in selling, general and administrative; and $6 in financial services expenses.
If viewed by type of cost, the combined charges reflect $956 for employee
separations and other related items; $1,235 for asset write-downs; $497 for
closing, selling and consolidating facilities; and $341 for other items. The
total charge reduced income from continuing operations by $2,036, or $1.28 per
share.
In addition, charges of $1,172 (net of taxes) in the third quarter of 1995
and $2,145 (net of taxes) in the fourth quarter of 1995 are reflected in the
loss from discontinued operations. These charges reduced income from
discontinued operations by a total of $3,317, or $2.08 per share in 1995.
6. INCOME TAXES
The following table shows the principal reasons for the difference between
the effective tax rate and the United States federal statutory income tax rate:
Years ended December 31 1996 1995 1994
U.S. federal statutory income tax rate 35% 35% 35%
Federal income tax at statutory rate $3,103 $1,839 $2,534
Amortization of investment tax credits (21) (35) (32)
State and local income taxes, net of
federal income tax effect 272 186 270
Amortization of intangibles 13 62 3
Foreign rate differential 131 (11) 14
Taxes on repatriated and accumulated
foreign income, net of tax credits 19 17 1
Legal entity restructuring (195) - -
Research credits (13) (24) (12)
Other differences - net (51) 16 69
Provision for income taxes $3,258 $2,050 $2,847
Effective income tax rate 36.7% 39.0% 39.3%
The U.S. and foreign components of income before income taxes and the
provision for income taxes are presented in this table:
Years ended December 31 1996 1995 1994
INCOME BEFORE INCOME TAXES
United States $9,069 $5,742 $7,367
Foreign (203) (487) (127)
Total $8,866 $5,255 $7,240
PROVISION FOR INCOME TAXES
CURRENT
Federal $2,289 $2,029 $2,144
State and local 397 395 309
Foreign 25 1 (12)
$2,711 $2,425 $2,441
DEFERRED
Federal $ 534 $ (232) $ 338
State and local 23 (109) 107
Foreign 11 1 -
$ 568 $ (340) $ 445
Deferred investment tax credits (21) (35) (39)
Provision for income taxes $3,258 $2,050 $2,847
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 1996 1995
LONG-TERM DEFERRED INCOME TAX LIABILITIES
Property, plant and equipment $5,302 $5,042
Investments 96 125
Other 1,403 2,069
Total long-term deferred income tax liabilities $6,801 $7,236
LONG-TERM DEFERRED INCOME TAX ASSETS
Business restructuring $ 195 $ 447
Net operating loss/credit carryforwards 220 181
Employee pensions and other benefits - net 1,300 623
Reserves and allowances 121 141
Valuation allowance (164) (128)
Other 302 526
Total long-term deferred income tax assets $1,974 $1,790
Net long-term deferred income tax liabilities $4,827 $5,446
CURRENT DEFERRED INCOME TAX LIABILITIES
Total current deferred income tax liabilities* $ 130 $ 104
CURRENT DEFERRED INCOME TAX ASSETS
Business restructuring $ 250 $ 141
Net operating loss/credit carryforwards 3 61
Employee pensions and other benefits 525 1,186
Reserves and allowances 734 768
Valuation allowance (2) (1)
Other 20 386
Total current deferred income tax assets $1,530 $2,541
Net current deferred income tax assets $1,400 $2,437
*Includes $13 of foreign deferred income taxes recorded in other current
liabilities.
At December 31, 1996 we had net operating loss carryforwards (tax effected)
for federal and state income tax purposes of $15 and $57, respectively, expiring
through 2010. We also had foreign net operating loss carryforwards (tax
effected) of $103, of which $96 has no expiration date, with the balance
expiring by the year 2000. We also had federal tax credit carryforwards of $47
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.
7. 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.
The asset and pension obligation amounts that were transferred to Lucent are
subject to final adjustment. The final amounts to be transferred to Lucent are
not expected to be materially different from the estimated amounts.
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 1996, 1995 and 1994.
Pension cost includes the following components:
Years ended December 31 1996 1995 1994
Service cost - benefits earned during
the period $ 299 $ 203 $ 239
Interest cost on projected benefit
obligation 863 748 701
Amortization of unrecognized prior
service costs 99 90 73
Credit for expected return on plan
assets* (1,195) (1,043) (1,015)
Amortization of transition asset (183) (193) (193)
Charges for special pension options - 58 -
Net pension credit $ (117) $ (137) $ (195)
* The actual return on plan assets was $2,981 in 1996, $1,044 in 1995 and $156
in 1994.
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 1996 1995
Actuarial present value of accumulated benefit
obligation, including vested benefits of
$10,083 and $9,874 $11,520 $10,959
Plan assets at fair value $17,680 $15,294
Less: Actuarial present value of projected
benefit obligation 12,380 11,572
Excess of assets over projected benefit obligation 5,300 3,722
Unrecognized prior service costs 766 804
Unrecognized transition asset (889) (1,136)
Unrecognized net gain (3,303) (1,620)
Net minimum liability of nonqualified plans (51) (49)
Prepaid pension costs $ 1,823 $ 1,721
We used these rates and assumptions to calculate the projected benefit
obligation:
At December 31 1996 1995
Weighted-average discount rate 7.5% 7.0%
Rate of increase in future compensation levels 5.0% 5.0%
The prepaid pension costs shown above are net of pension liabilities for
plans where accumulated plan benefits exceed assets. Such liabilities are
included in other liabilities in the Consolidated Balance Sheets.
We are amortizing over approximately 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 $56 and $61 of AT&T common stock
at December 31, 1996 and 1995, 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 $180 in 1996,
$159 in 1995 and $134 in 1994.
8. POSTRETIREMENT BENEFITS
Our benefit plans for retirees include health care benefits, life insurance
coverage and telephone concessions.
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. The assets and postretirement benefit
obligations that were transferred to Lucent are subject to final adjustment. The
final amounts to be transferred to Lucent are not expected to be materially
different from the estimated amounts.
This table shows the components of the net postretirement benefit cost:
Years ended December 31 1996 1995 1994
Service cost - benefits earned during the period $ 54 $ 41 $ 45
Interest cost on accumulated postretirement
benefit obligation 263 258 245
Expected return on plan assets* (99) (78) (64)
Amortization of unrecognized prior service costs 39 23 4
Amortization of net loss (gain) 2 (5) 1
Charge for special options 1 2 -
Net postretirement benefit cost $260 $241 $231
* The actual return on plan assets was $313 in 1996, $256 in 1995 and $(11) in
1994.
We had approximately 37,900, 34,500 and 34,000 retirees as of December 31,
1996, 1995 and 1994, respectively.
Our plan assets consist primarily of listed stocks, corporate and
governmental debt, cash and cash equivalents and life insurance contracts. The
following table shows the funded status of our postretirement benefit plans
reconciled with the amounts recognized in the Consolidated Balance Sheets:
At December 31
1996 1995
Accumulated postretirement benefit obligation:
Retirees $2,244 $2,138
Fully eligible active plan participants 453 432
Other active plan participants 1,042 1,195
Total accumulated postretirement benefit obligation 3,739 3,765
Plan assets at fair value 1,566 1,241
Unfunded postretirement obligation 2,173 2,524
Less:
Unrecognized prior service costs 206 263
Unrecognized net gain
(510) (54)
Accrued postretirement benefit obligation
$2,477 $2,315
We made these assumptions in valuing our postretirement benefit obligation
at December 31:
1996 1995
Weighted-average discount rate
7.5% 7.0%
Expected long-term rate of return on plan assets
9.0% 9.0%
Assumed rate of increase in the per capita cost of
covered health care benefits
5.6% 6.1%
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 1996 to
4.7% by the year 2006 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, 1996 by $166 and our 1996 postretirement benefit costs by $19.
9. STOCK-BASED COMPENSATION PLANS
Under the 1987 Long-Term Incentive Program, we grant stock options,
performance shares, restricted stock and other awards. On January 1 of each
year, 0.6% of the outstanding shares of our common stock become available for
grant. The exercise price of any stock option is equal to or greater than 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. 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 return-to-equity
performance compared with a target.
Under the AT&T 1996 Employee Stock Purchase Plan (Plan) which was effective
July 1, 1996, we are authorized to issue up to 50 million shares of common stock
to our eligible employees. Under the terms of the Plan, employees may have up to
10% of their earnings withheld to purchase AT&T's common stock. The purchase
price of the stock on the date of exercise is 85% of the average high and low
sale prices of shares on the New York Stock Exchange for that day. Under the
Plan, we sold approximately 3 million shares to employees during 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 $41 in 1996.
A summary of option transactions is shown below:
Weighted-
Average
Exercise
Shares in thousands 1996 Price
1995 1994
Outstanding at January 1 47,689 $43.21 40,285
38,012
Lucent and NCR
spin-off adjustments 22,678 -
- - -
Options granted 9,132 $45.53
13,276 5,803
Options and SARs
exercised (10,708) $19.16 (8,181)
(2,498)
Average exercise price $29.39
$25.04
Options assumed in
purchase of LIN - -
3,382 -
Options canceled or
forfeited:
Lucent and NCR spin-offs (16,179) $37.25
- - -
Other employee plans (5,702) $37.12 (1,073)
(1,032)
At December 31:
Options outstanding 46,910 $33.89 47,689
40,285
Average exercise price $43.21
$36.61
Options exercisable 28,034 $28.81 28,775
28,010
Shares available for grant 19,693 - 17,524
22,015
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 1996, 73,145 SARs were exercised and no SARs were granted. The
number of outstanding SARs was adjusted by 131,088 in connection with the Lucent
and NCR spin-offs. At December 31, 1996, 743,840 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
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:
Years ended December 31 1996
1995
Income from continuing operations $5,537
$3,192
Income (loss) from discontinued operations 111
(3,072)
Net income $5,810
$ 120
Earnings per common share
Continuing operations $ 3.43 $
2.00
Discontinued operations .07
(1.92)
Net income $ 3.60
$ .08
Without the effect of pro forma costs related to the conversion of options
in the Lucent and NCR spin-offs, pro forma income from continuing operations was
$5,567 or $3.44 per share in 1996.
The pro forma effect on net income for 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 1996 and 1995 were $13.12 and $14.02, respectively, and were estimated
using the Black-Scholes option-pricing model. The following assumptions were
applied for periods before the Lucent spin-off and subsequent to the Lucent
spin-off, respectively: (i) expected dividend yields of 2.4% and 2.8%, (ii)
expected volatility rates of 19.0% and 21.0%, and (iii) expected lives of 5.0
years and 4.5 years. The risk-free interest rates applied for 1996 and 1995 were
6.11% and 6.44%, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1996:
Options Outstanding Options
Exercisable
Number Weighted- Number
Outstanding Average Weighted-
Exercisable Weighted-
Range of at Remaining Average
at Average
Exercise Dec. 31, 1996 Contractual Exercise Dec. 31,
1996 Exercise
Prices (in thousands) Life Price (in
thousands) Price
$ 1.11 - $15.76 1,619 2.45 $11.90
1,619 $11.90
15.83 - 27.12 12,666 4.03 23.26
12,647 23.26
27.16 - 34.95 8,991 6.89 34.16
5,036 33.59
35.20 - 36.96 10,106 6.81 35.96
7,157 36.08
$37.02 - $47.37 13,528 8.53 44.74
1,575 42.38
46,910 6.42 $33.89
28,034 $28.81
10. DEBT OBLIGATIONS
DEBT MATURING WITHIN ONE YEAR
At December 31 1996 1995
Commercial paper $1,950 $10,917
Long-term debentures and notes 463 1,193
Other 47 66
Total debt maturing within one year $2,460 $12,176
Weighted-average interest rate of
short-term debt 5.5% 5.7%
A consortium of lenders provides revolving credit facilities of $6.0
billion to AT&T. These credit facilities are intended for general corporate
purposes, which include support for AT&T's commercial paper, and were unused at
December 31, 1996.
LONG-TERM OBLIGATIONS
At December 31 1996 1995
Interest Rates (a) Maturities
DEBENTURES
4 3/8% to 4 3/4% 1998-1999 $ 500 $ 750
5 1/8% to 6% 2000-2001 500 500
8 1/8% to 8 5/8% 1997-2031 1,996 1,999
NOTES
4 1/4% to 7 3/4% 1997-2025 4,341 5,380
7 4/5% to 8 19/20% 1997-2025 786 838
9% to 13% 1997-2004 60 101
Variable rate 1997-2054 115 120
Total debentures and notes 8,298 9,688
Other 112 122
Less: Unamortized discount - net 64 75
Total long-term obligations 8,346 9,735
Less: Amounts maturing within one year 463 1,193
Net long-term obligations $7,883 $8,542
(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, 1996, of the $8,346 in
total long-term obligations:
1997 1998 1999 2000 2001
Later Years
$463 $892 $1,065 $670 $652
$4,604
11. 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 commitments to extend credit, 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, 1996
and 1995, in management's opinion there was no significant risk of loss in the
event of nonperformance of the counterparties to these financial instruments. We
control our exposure to credit risk through credit approvals, credit limits and
monitoring procedures and we believe that our reserves for losses are adequate.
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.
COMMITMENTS TO EXTEND CREDIT
We participate in the general-purpose credit card business through AT&T
Universal Card Services Corp., a wholly owned subsidiary. We purchase
essentially all cardholder receivables under an agreement with the Universal
Bank, which issues the cards. The unused portion of available credit was $69,041
at December 31, 1996 and $72,179 at December 31, 1995. This represents the
receivables we would need to purchase if all Universal Card accounts were used
up to their full credit limits. The potential risk of loss associated with, and
the estimated fair value of, the unused credit lines are not considered to be
significant.
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, we issued guarantees for certain debt obligations of AT&T Capital and
NCR. At December 31, 1996, the amount of guaranteed debt associated with AT&T
Capital and NCR was $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, 1996
are at rates ranging from 4.68% to 7.75%. Floating-rate payments are based on
rates tied to prime, LIBOR or U.S. Treasury bills. Interest rate differentials
paid or received under these swap contracts are recognized over the life of the
contracts as adjustments to the effective yield of the underlying debt. If we
terminate a 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.
The following table indicates the types of swaps in use at December 31,
1996 and 1995 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.
1996 1995
Fixed to variable swaps - notional amount $1,342 $1,417
Average receive rate 6.67% 6.57%
Average pay rate 5.45% 5.62%
Variable to fixed swaps - notional amount $ 351 $ 894
Average receive rate 5.77% 5.64%
Average pay rate 5.71% 6.05%
The weighted average remaining terms of the swap contracts are 4 years for
1996 and 8 years for 1995.
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, 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. These transactions are
generally expected to occur in less than one year. Gains or losses on foreign
exchange contracts that are designated for forecasted and other foreign currency
transactions are recognized in other income as the exchange rates change.
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.
1996 1995
Contract/ Contract/
Notional Notional
Amount Amount
DERIVATIVES AND OFF BALANCE SHEET
INSTRUMENTS
Interest rate swap agreements $ 1,693 $ 2,311
Foreign exchange:
Forward contracts 646 491
Option contracts 65 8
Letters of credit 264 260
Guarantees of debt 328 112
The tables below show the valuation methods and the carrying amounts and
estimated fair values of material financial instruments.
Financial instrument Valuation method
Universal Card finance receivables Carrying amounts. These
accrue interest
at a prime-based rate
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 Not practicable. There are
no quoted
market prices for similar agreements
available
Interest rate swap agreements Market quotes obtained from
dealers
Foreign exchange contracts Market quotes
For finance receivables other than leases, the carrying amount equals the
fair value. These amounts were $6,688 and $10,263 for 1996 and 1995,
respectively. For debt excluding capital leases, the carrying amounts and fair
values were $10,330 and $10,620, respectively, for 1996; and $20,698 and
$21,225, respectively, for 1995.
1996
Carrying Amount
Fair Value
Asset Liab.
Asset Liab.
DERIVATIVES AND OFF BALANCE SHEET
INSTRUMENTS
Interest rate swap agreements $ 5 $ 9
$47 $23
Foreign exchange forward contracts 6 15
7 35
1995
Carrying Amount
Fair Value
Asset Liab.
Asset Liab.
DERIVATIVES AND OFF BALANCE SHEET
INSTRUMENTS
Interest rate swap agreements $ 8 $ 6
$63 $46
Foreign exchange forward contracts 6 28
10 20
SECURITIZATION OF RECEIVABLES
For the years ended December 31, 1996 and 1995, we securitized portions of
our short-term finance receivable portfolios amounting to $3,000 and $3,500,
with proceeds received of $3,000 and $3,492, respectively. We continue to
service these accounts for the purchasers. At December 31, 1996 and 1995, $6,500
and $3,500, respectively, of receivables previously securitized remained
outstanding.
12. SEGMENT INFORMATION
INDUSTRY SEGMENTS
AT&T operates in two industry segments, the telecommunications industry and
the financial services industry. Our communications services (which is part of
the telecommunications industry) consist of a wide range of services to
residential and business customers, including domestic and international
wireline long distance voice, data and video services, wireless services,
network management, business consulting, outsourcing, electronic commerce
solutions and internet access service. Additionally, we are embarking on a
strategy to expand our services to local service. Financial services is
primarily our AT&T Universal Card credit card business. Revenues between
industry segments are not material.
1996
1995 1994
REVENUES
Communications services $50,515 $48,403
$45,938
Financial services 1,669 2,261
1,838
Total revenues $52,184 $50,664
$47,776
OPERATING INCOME (LOSS)
Communications services $ 9,198 $ 5,834 $
7,861
Financial services 78
300 218
Corporate and nonoperating (410)
(879) (839)
Income from continuing operations
before income taxes $ 8,866 $ 5,255 $
7,240
ASSETS
Communications services $46,092 $42,440
$34,443
Financial services 8,462 12,049
13,737
Corporate assets 729
589 476
Eliminations (257)
(109) (78)
Total assets - continuing operations 55,026 54,969
48,578
Net assets of discontinued operations 526 7,426
8,870
Total assets $55,552 $62,395
$57,448
DEPRECIATION AND AMORTIZATION
Communications services $ 2,740 $ 3,520 $
2,394
Financial services 12
7 18
GROSS CAPITAL EXPENDITURES
Communications services $ 6,776 $ 4,522 $
3,361
Financial services 9
- - 9
TOTAL LIABILITIES
Financial services $ 7,534 $10,842
$12,670
CONCENTRATIONS
As of December 31, 1996 we are not aware of 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.
13. AT&T CREDIT HOLDINGS, INC.
In connection with a March 31, 1993 legal restructuring of AT&T Capital
Holdings, Inc. (formerly AT&T Capital Corporation), we 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 December 31, 1996, $59 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 table below 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.
1996
1995 1994
Total revenues $ 202 $
190 $ 58
Income from continuing operations 31
26 19
Income from discontinued operation 200
93 73
Net income $ 231 $
119 $ 92
Finance receivables $1,102 $1,149
Net assets of discontinued operation - 835
Total assets 3,075 2,355
Total debt 60 100
Total liabilities 1,891 1,343
Total shareowners' equity $1,184 $1,012
14. 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, 1996. 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 2014. Our rental expense under operating leases was $721
in 1996, $766 in 1995 and $819 in 1994. The following table shows our future
minimum lease payments due under noncancelable operating leases at December 31,
1996. Such payments total $2,873. The total of minimum rentals to be received in
the future under noncancelable subleases as of December 31, 1996 was $329.
1997 1998 1999 2000 2001
Later Years
$606 $469 $359 $312 $234
$893
We have entered into agreements with Lucent and NCR pursuant to which we
will purchase products and services totaling at least $3,000 cumulatively by the
end of 1998 from Lucent and $350 from NCR by the end of 1999. As of December 31,
1996 we purchased $2,726 of products and services from Lucent and NCR under
these agreements.
In January 1997 one of our satellites went out of orbital alignment.
Contact could not be reestablished and the satellite was declared permanently
out of service. Under various contracts related to previous sales of
transponders associated with this satellite, we are required to either repair or
replace the transponder or refund portions of the sale price. We have insurance
to cover a portion of our exposure under these warranties as well as the
carrying value of the satellite. We believe that the ultimate resolution will
not have a material impact on our results of operations.
15. QUARTERLY INFORMATION (UNAUDITED)
1996 First Second
Third Fourth
Total revenues $12,850 $12,868
$13,228 $13,238
Operating income 2,413 2,319
2,174 1,904
Income from continuing operations 1,469 1,538
1,359 1,242
Income(loss) from discontinued
operations (107) (47)
73 219
Gain on sale of discontinued
operation - -
- - 162
Net income 1,362 1,491
1,432 1,623
Income(loss) per common share:
Continuing operations .92 .95
.84 .76
Discontinued operations (.07) (.03)
.05 .14
Gain on sale of discontinued
operation - -
- - .10
Net income .85 .92
.89 1.00
Dividends declared .33 .33
.33 .33
Stock price*:
High $68 7/8 $64 7/8 $62
3/8 $44 1/2
Low 60 1/8 58 49
1/4 33 1/4
Quarter-end close 61 1/8 62 52
1/4 43 3/8
* Stock prices obtained from the Composite Tape.
Stock prices on or before September 30, 1996 have not been restated to
reflect the Lucent spin-off. Stock prices on or before December 31, 1996 have
not been restated to reflect the NCR spin-off.
1995 First Second
Third Fourth
Total revenues $12,244 $12,614
$12,920 $12,886
Operating income(loss) 2,068 2,240
2,396 (1,251)
Income(loss) from continuing
operations 1,261 1,367
1,525 (948)
Loss from discontinue operations (63) (12)
(1,263) (1,728)
Net income(loss) 1,198 1,355
262 (2,676)
Income(loss) per common share:
Continuing operations .80 .86
.96 (.59)
Discontinued operations (.04) (.01)
(.80) (1.08)
Net income(loss) .76 .85
.16 (1.67)
Dividends declared .33 .33
.33 .33
Stock price*:
High $53 1/4 $53 3/4 $66
3/8 $68 1/2
Low 47 5/8 47 7/8 51
3/8 60 1/4
Quarter-end close 51 3/4 53 65
3/4 64 3/4
* Stock prices obtained from the Composite Tape.
In the third quarter of 1995, we recorded $1,597 of charges which decreased
income from discontinued operations by $1,172 or $0.74 per share.
In the fourth quarter of 1995, we recorded pre-tax charges
of $3,029 which
decreased income from continuing operations by $2,036, or $1.27
per share. In
addition, the loss from discontinued operations includes charges
of $2,145 (net
of taxes), or $1.34 per share.
- ----------
Information contained on the outside back cover of the Annual Report to
Shareowners and incorporated herein is as follows:
STOCK DATA
AT&T (ticker symbol "T") is listed on the New York Stock Exchange, as well as on
the Boston, Midwest, Pacific and Philadelphia exchanges in the U.S., and on
stock exchanges in Brussels, London, Paris and Geneva.
Shareowners of record as of December 31, 1996: 2,120,340.