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2006 Annual Report : : AT&T Inc.
Delivering on our promise

Table of contents

  • Page 1
    2006 Annual Report :: AT&T Inc. Delivering on our promise

  • Page 2
    ...is the nation's largest company-sponsored volunteer organization, and the AT&T Foundation is one of the nation's top-10 charitable-giving corporate foundations. Community 2006 Pro Forma Revenue Sources by Customer * 34% 26% 12% 23% 5% Wireless Business Wholesale Consumer Directory/Other * Pro...

  • Page 3
    ... a tradition of delivering on our promises. I'm pleased to report that in 2006, we continued that tradition. We promised to increase stockholder value, and we did. We promised to position our company for long-term growth, and we did. The year also marked another step in a strategy to establish AT...

  • Page 4
    ...we now offer high speed Internet access on wireless handsets in more than 165 U.S. cities, allowing customers to download videos, e-mail, games and music faster than ever. We also migrated virtually all of our wireless traffic to our advanced GSM network. Using a single worldwide technology standard...

  • Page 5
    ... even more customer issues on the first - and only - call to us. We have introduced faster installations, which can now be done in the evenings and on weekends, and DSL plans without early termination fees. For our business customers, we have reduced the time it takes to provide some services by as...

  • Page 6
    ... benefits our enterprise customers and supports our three-screen strategy for consumers - to integrate the wireless phone, TV and PC under a single, unified service. RIGHT: The iPhone from Apple and AT&T will transform the way people think about wireless communications. n n 4 : : 2006 AT&T Annual...

  • Page 7
    ...GSM technology, our wireless customers can make and receive voice calls in 190 countries and access data services in 120 countries. And in more than 165 U.S. cities, including 73 of the top 100 markets, we now offer high speed Internet access from wireless handsets and laptop computers equipped with...

  • Page 8
    ... plan creates a calling community of more than 100 million AT&T wireless and wireline phone numbers, including homes and businesses. AT&T continues to demonstrate leadership in wireless entertainment. We have expanded our offerings to include the most comprehensive mobile music subscription service...

  • Page 9
    ... Megastores to transfer point-of-sale data between locations and allows Virgin's customers to listen to music before making a purchase. ABOVE RIGHT: In 2006, we expanded the availability of enterprise-level solutions to small and midsized businesses. n n Business : : 2006 AT&T Annual Report : : 7

  • Page 10
    ... to be granted a license to provide telecommunications services. In response to rising customer demand for hosting and managed services, we expanded our network of highly secure Internet Data Centers to 32, half of which are located outside the United States. We also acquired USinternetworking...

  • Page 11
    ...just-in-time delivery to retailers or distributors. We also plan to introduce a robust enterprise mobility offering that will allow our customers to benefit from the convergence of wireless and wireline networks. ABOVE AND INSET: AT&T BusinessDirect® allows business customers to manage and monitor...

  • Page 12
    ...enables Wi-Fi access at more than 47,500 locations in 79 countries. Availability of AT&T U-verse TV. In 2006, we expanded our revolutionary IP-based service, AT&T U-verse TV. n n In our last annual report, we told our stockholders that we would leverage the power of IP technology to transform our...

  • Page 13
    ... local cable providers. U-verse subscribers now have access to more than 300 television channels, and in 2007, we plan to expand AT&T U-verse availability and add new features. We also continue to offer video service through our existing relationships with satellite TV providers DISH Network and...

  • Page 14
    ... announced the expansion of our sales channels. We announced that we plan to offer AT&T Yahoo! High Speed Internet service at 570 Wal-Mart stores. Customers can now also buy our broadband products from Amazon.com, which has more than 64 million active customer accounts. In October, we relaunched AT...

  • Page 15
    ... site makes buying wireless service easier than ever. Customers can also establish a personal online account that enables them to review and pay bills, check voice minutes or data usage, access tutorials and upgrade their phones. n n ABOVE LEFT: An AT&T technician offers an at-home consultation...

  • Page 16
    ... for Broadband Customers During 2006, we simplified pricing and service options for AT&T Yahoo! High Speed Internet service and for our local and long distance voice packages. We also introduced DSL plans without contract requirements or early termination fees. And we now install service during...

  • Page 17
    ... $101 million through corporate-, employee- and AT&T Foundation-giving programs. The Gift of Time. Through the AT&T Pioneers program, nearly 350,000 employees and retirees donated time to community projects in 2006. Support for Our Military. For more than 85 years, AT&T has supported the U.S. armed...

  • Page 18
    ... business environment - one that makes our company an employer of choice, a preferred business partner and an important contributor to the community. AT&T is a recognized leader for diversity in hiring and contracting. Our employee base is 44 percent women and 35 percent people of color. And we work...

  • Page 19
    ... Financial Statements Report of Management Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting Board of Directors Senior Officers 18 19 47 51 80 81 82 83 84 2006 AT&T Annual Report : : 17

  • Page 20
    ...cellular/PCS customers. The 2004 number includes customers from the acquisition of AT&T Wireless Services, Inc. Prior to the December 29, 2006 BellSouth acquisition, AT&T Mobility was a joint venture in which we owned 60% and was accounted for under the equity method. 18 : : 2006 AT&T Annual Report

  • Page 21
    ...increased competition, as customers continue to disconnect both primary and additional lines and began using wireless and Voice over Internet Protocol (VoIP) technology offered by competitors and cable instead of phone lines for voice and data. Operating revenues increased $19,291, or 44.1%, in 2006...

  • Page 22
    ...This segment provides both retail and wholesale landline telecommunications services, including local and long-distance voice, switched access, Internet Protocol (IP) and Internet access data, messaging services, managed networking to business customers, our U-verseSM 20 : : 2006 AT&T Annual Report

  • Page 23
    ... to increased competition, as customers disconnected lines and switched to competitors' alternative technologies, such as wireless and VoIP, for voice and data. The improvement in our wireline segment operating income in 2005 was due primarily to the continued growth in our data and long-distance...

  • Page 24
    ... in long-distance penetration levels and sales of combined long-distance and local calling fixed-fee offerings (referred to as "bundling"). These increases were partially offset by continued market maturity, which slowed revenue growth in 2005. • Local voice revenues increased $708 in 2006 and...

  • Page 25
    ... in our long-distance service. • Higher equipment sales and related network integration services of $195 reflecting our emphasis on growth in DSL and sales in the large-business market and video. • Merger severance accruals in 2005 of $176. • Salary and wage merit increases and other bonus...

  • Page 26
    ... access lines served by AT&T's ILECs (excludes subsidiaries of BellSouth). 2 Competitive local exchange carriers (CLECs). 3 Broadband connections include DSL lines of 8,529 in 2006 and 6,921 in 2005, U-verse high-speed Internet access and satellite broadband. 24 : : 2006 AT&T Annual Report

  • Page 27
    ...to increasing competition, resulting in pricing reductions. Additionally, the increase in prepaid and reseller customers over the past year has contributed to the decline in ARPU. We expect continued pressure on ARPU, despite our increasing revenue from data services. 2006 AT&T Annual Report : : 25

  • Page 28
    ... a 44.8% increase in average data revenue per customer and increased long-distance revenue per customer. The continued increase in data revenue was related to increased use of text messaging, Internet access, e-mail and other data services, which we expect to grow as we continue expanding our third...

  • Page 29
    ... to AT&T Mobility service offerings, which required new handsets. Total equipment costs continue to be higher than equipment revenues due to the sale of handsets below cost to customers who committed to one-year or twoyear contracts or in connection with other promotions. Selling, general and...

  • Page 30
    ... $39 in Internet advertising revenue. These results reflect the impact of competition from other publishers, other advertising media and continuing economic pressures on advertising customers. Cost of sales increased $13, or 1.2%, in 2006 and increased $82, or 8.0%, in 2005. The increase in 2006 was...

  • Page 31
    ... increased in 2006 attributable to growth in DSL, long distance, wholesale wireless transport and emerging data services as well as electronic media and print services. The year-over-year growth in consolidated revenues was positively impacted by one-time credits issued during 2005 to customers...

  • Page 32
    ... operating revenues. We expect our sole ownership of AT&T Mobility will enhance our bundling opportunities (see "AT&T Mobility" discussed in "Expected Growth Areas"). We also expect to expand services in the national business market, to utilize our broadband network and to move toward wireless and...

  • Page 33
    ... digital television, high-speed broadband and VoIP services to our residential and small-business customers. We have been building out this network in numerous locations and are now providing AT&T U-verse services, including U-verse TV (IPTV) video, in limited parts of 11 markets as of year-end 2006...

  • Page 34
    ...business and government accounts by providing these customers with access to sales and support professionals focused solely on their specialized needs. • Continued improvement on the coverage and quality of our network. We have substantially completed integrating the AT&T Mobility and AWE networks...

  • Page 35
    ... and services, including wireless and video, largebusiness data services, broadband and long-distance service. In some markets, we compete with large cable companies, such as Comcast Corporation, Cox Communications, Inc. and Time Warner Inc., for local and high-speed Internet services customers and...

  • Page 36
    ...using the largest class of nationwide Internet networks (Internet backbone), wireless carriers, CLECs, regional phone ILECs, cable companies and systems integrators. These services are subject to additional competitive pressures from the development of new technologies and the increased availability...

  • Page 37
    ... pension and postretirement cost to increase $802 over 2006. The 10-year returns on our pension plan were 10.2% through 2006, including returns in excess of our assumed rate of return for 2006. Under GAAP, the expected long-term rate of return is calculated on the market-related value of assets...

  • Page 38
    ... data from websites. We also agreed to offer broadband Internet access service to all residential living units within our 22-state service territory by December 31, 2007. We will provide this access to at least 85% of these living units using wireline technologies and will use alternative...

  • Page 39
    ...' telephone services or Internet services, or that were residential telephone or Internet subscribers or customers at any time after September 2001." They allege that the defendants have disclosed and are currently disclosing to the U.S. Government records concerning communications to which...

  • Page 40
    ... may increase slightly if the programming and features of the video offering expand or if additional network conditioning is required. We expect that the business opportunities made available, specifically in the data/broadband area, will allow us to expand our products and services (see "U-verse...

  • Page 41
    ... to called and put debt with interest rates ranging from 6.35% to 9.5%. • $56 related to scheduled principal payments on other debt and repayments of other borrowings. In May 2006, we received net proceeds of $1,491 from the issuance of $1,500 of long-term debt consisting of $900 of two-year...

  • Page 42
    ...long-term debt and debt maturing within one year) and stockholders' equity. Our capital structure does not include debt issued by our international equity investees. Total capital increased $90,076 in 2006 compared to $17,791 in 2005. The 2006 total capital increase was primarily due to the purchase...

  • Page 43
    ... or to engage in speculative activity. Our capital costs are directly linked to financial and business risks. We seek to manage the potential negative effects from market volatility and market risk. The majority of our financial instruments are mediumand long-term fixed rate notes and debentures...

  • Page 44
    ... expense that would result from a probable change in interest rates. When the potential increase in interest expense exceeds an acceptable amount, we reduce risk through the issuance of fixed rate (in lieu of variable rate) instruments and the purchase of derivatives. 42 : : 2006 AT&T Annual Report

  • Page 45
    ... Total Number of Shares Purchased Average Price Paid per Share1 Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs October 2, 2006 - October 31, 2006 November 1, 2006 - November 30, 2006...

  • Page 46
    ...and competes for customers based principally on price, service offerings, call quality, coverage area and customer service. In addition, AT&T Mobility is likely to experience growing competition from providers offering services using alternative wireless technologies and IP-based networks as well as...

  • Page 47
    ... of which are newer companies, are deploying this IP-based technology. In order to continue to offer attractive and competitively priced services, we are deploying a new broadband network to offer IP-based voice, data and video services. Using a new and sophisticated technology on a very large scale...

  • Page 48
    ... Our ability to absorb revenue losses caused by increasing competition, including offerings using alternative technologies (e.g., cable, wireless and VoIP), and our ability to maintain capital expenditures. • The extent of competition and the resulting pressure on access line totals and wireline...

  • Page 49
    ... Dollars in millions except per share amounts 2006 2005 2004 Operating Revenues Voice Data Wireless service Directory Other Total operating revenues Operating Expenses Cost of sales (exclusive of depreciation and amortization shown separately below) Selling, general and administrative Depreciation...

  • Page 50
    ...and Advances to AT&T Mobility Postemployment Benefit Other Assets Total Assets Liabilities and Stockholders' Equity Current Liabilities Debt maturing within one year Accounts payable and accrued liabilities Accrued taxes Dividends payable Total current liabilities Long-Term Debt Deferred Credits and...

  • Page 51
    ... other short-term borrowings Issuance of long-term debt Repayment of long-term debt Purchase of treasury shares Issuance of treasury shares Repurchase of preferred shares of subsidiaries Dividends paid Stock-based compensation tax benefit Other Net Cash (Used in) Provided by Financing Activities Net...

  • Page 52
    ...35, $1.30 and $1.26 per share) Other Balance at end of year Treasury Shares Balance at beginning of year Purchase of shares Issuance of shares Balance at end of year Additional Minimum Pension Liability Adjustment Balance at beginning of year Required adjustments, net of taxes of $6, $(17) and $578...

  • Page 53
    ... (ATTC), we revised our segment reporting in 2006 (see Note 4). In addition, we revised the product categories reported in operating revenue as follows: long distance is now reported in voice revenue; the majority of customer premises equipment and integration services 2006 AT&T Annual Report : : 51

  • Page 54
    ... customers are recorded as a reduction of revenue. When required as part of providing service, revenues and associated expenses related to nonrefundable, upfront service activation and set-up fees are deferred and recognized over the associated service contract period. If no service contract exists...

  • Page 55
    ...wireless communications services. While FCC licenses are issued for a fixed time, renewals of FCC licenses have occurred routinely and at nominal cost. Moreover, AT&T Mobility has determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit...

  • Page 56
    ... benefits. In accordance with Statement of Financial Accounting Standards No. 141, "Business Combinations" (FAS 141), severance accruals recorded for the BellSouth and ATTC acquisition related to the acquired employees were included in the purchase price allocation (see Note 2). At December 31, 2006...

  • Page 57
    ... of fiber-optic cable to points near end-users, will complement our existing plans to deploy IPTV to existing wireline service areas and to increase the number of potential customers for our IPTV product. The application of purchase accounting under FAS 141, requires that the total purchase price be...

  • Page 58
    ...,341 customers, 9.6 years for business customers and 7 years for directory customers. This sum-of-the-months-digits method of amortization best reflects the estimated pattern in which the economic benefits will be consumed. BellSouth's 40% economic ownership of AT&T Mobility has been recorded above...

  • Page 59
    ... domestic and multinational businesses, small and medium-sized businesses and government agencies, and operated one of the largest telecommunications networks in the U.S. ATTC also provided domestic and international long-distance and usage-basedcommunications services to consumer customers. ATTC is...

  • Page 60
    ...provider of distributed order management and supply-chain fulfillment services. Dispositions Net proceeds from the 2004 dispositions of our international investments were generally used to fund, in part, our share of the purchase price paid by AT&T Mobility to acquire AT&T Wireless (AWE). Directory...

  • Page 61
    ... local and long-distance voice, switched access, IP and Internet access data, messaging services, managed networking to business customers, our U-verseSM video service and satellite television services through our agreement with EchoStar Communications Corp. (EchoStar). The wireless segment reflects...

  • Page 62
    ... we accounted for AT&T Mobility using the equity method of accounting prior to the December 29, 2006 acquisition, these revenues were not eliminated upon consolidation and as such, remain in consolidated revenue. The Consolidation and Elimination column includes those line items that we manage on...

  • Page 63
    ...873 922 7,165 NOTE 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is summarized as follows at December 31: Lives (years) 2006 2005 Land Buildings Central office equipment Cable, wiring and conduit Other equipment Software Under construction Accumulated depreciation and amortization...

  • Page 64
    ... in Alestra S. de R.L. de C.V., a telecommunications company in Mexico. 62 : : 2006 AT&T Annual Report On December 29, 2006, we assumed $28,321 in long-term debt and capital leases related to our acquisition of BellSouth (see Note 2). The debt of AT&T Mobility was included in the amount assumed now...

  • Page 65
    ... to called and put debt with interest rates ranging from 6.35% to 9.5%. • $56 related to scheduled principal payments on other debt and repayments of other borrowings. In May 2006, we received net proceeds of $1,491 from the issuance of $1,500 of long-term debt consisting of $900 of two-year...

  • Page 66
    ...determined using the specific identification method. Our proceeds from the sales of our available-for-sale equity securities were $10 in 2006, $125 in 2005 and $3,188 in 2004. Our short-term investments, other short-term and longterm held-to-maturity investments and customer deposits are recorded at...

  • Page 67
    ... rise to levels sufficient to realize the entire tax benefit currently reflected in our balance sheet. Taxes computed at federal statutory rate $3,809 Increases (decreases) in income taxes resulting from: State and local income taxes - net of federal income tax benefit 234 Effects of international...

  • Page 68
    ... obligation. In addition, the accumulated postretirement benefit obligations are to be measured using actuarial assumptions and terms of the substantive plans, as determined by the purchaser. As such, and consistent with our practice, we did not account for the annual dollar value cap of medical and...

  • Page 69
    ... cash balance amount and a negotiated, annual pension band and interest credits. Most nonmanagement employees can elect to receive their pension benefits in either a lump sum payment or an annuity. At December 31, 2006, certain defined pension plans formerly sponsored by ATTC and AT&T Mobility were...

  • Page 70
    ... benefits based on employee service and compensation as of a certain date and does not include an assumption about future compensation levels. The accumulated benefit obligation for our pension plans was $53,662 at December 31, 2006, and $44,139 at December 31, 2005. 68 : : 2006 AT&T Annual Report

  • Page 71
    ..., including the rates of return on high-quality, fixed-income corporate bonds available at the measurement date and the related expected duration for the obligations. For the year ended December 31, 2006, we increased our discount rate by 0.25%, resulting in a decrease in our pension plan benefit of...

  • Page 72
    ... benefit plans be funded annually. The principal investment objectives are: to ensure the availability of funds to pay pension and postretirement benefits as they become due under a broad range of future economic scenarios; to maximize long-term investment return with an acceptable level...

  • Page 73
    ... plan assets at December 31, 2006. Estimated Future Benefit Payments Expected benefit payments are estimated using the same assumptions used in determining our benefit obligation at December 31, 2006. Because benefit payments will depend on future employment and compensation levels, average years...

  • Page 74
    ... expected return on plan assets of 6.09%. The December 31, 2005, benefit obligations were determined using a weighted-average discount rate of 4.55% and a weighted-average rate of compensation increase of 4.25%. Net periodic pension cost was $4 for the 43 days ended 72 : : 2006 AT&T Annual Report

  • Page 75
    ...Under our various plans, senior and other management and nonmanagement employees and nonemployee directors have received stock options, performance stock units and other nonvested stock units. Stock options issued through December 31, 2006 carry exercise prices equal to the market price of our stock...

  • Page 76
    ... Flows 2006 2005 2004 Cash paid during the year for: Interest Income taxes, net of refunds $ 1,666 $ 1,395 2,777 2,038 $ 1,043 506 NOTE 12. STOCKHOLDERS' EQUITY From time to time, we repurchase shares of common stock for distribution through our employee benefit plans or in connection with...

  • Page 77
    ... provide wireless communications services. While FCC licenses are issued for a fixed time, renewals of FCC licenses have occurred routinely and at nominal cost. Moreover, we have determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit...

  • Page 78
    ... of $1,466 in 2006, $869 in 2005 and $602 in 2004 for services sold to AT&T Mobility. These revenues were primarily from access and long-distance services sold to AT&T Mobility on a wholesale basis and commissions revenue related to customers added through AT&T sales sources. The offsetting expense...

  • Page 79
    ... method of accounting. We have listed BellSouth separately because we have guaranteed securities that are legal Condensed Consolidating Statements of Income For the Twelve Months Ended December 31, 2006 obligations of BellSouth that would otherwise require SEC periodic reporting for 2006. In the...

  • Page 80
    ... equivalents Accounts receivable - net Other current assets Total current assets Property, plant and equipment - Net Goodwill Intangible Assets - Net Investments in Equity Affiliates Other Assets Total Assets Debt maturing within one year Other current liabilities Total current liabilities Long-term...

  • Page 81
    ...24.97 25.60 $22.99 22.78 23.20 21.75 $23.69 23.75 23.97 24.49 Quarterly earnings per share impacts may not add to full-year earnings per share impacts due to the difference in weighted-average shares for the quarters versus the weighted-average shares for the year. 2006 AT&T Annual Report : : 79

  • Page 82
    ... and fair presentation of published financial statements. AT&T management assessed the effectiveness of the company's internal control over financial reporting as of December 31, 2006. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the...

  • Page 83
    ... with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring...

  • Page 84
    ... statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect...

  • Page 85
    ...-2006 Background: Financial services August A. Busch III, 69 (2,3,4) President and Chief Executive Officer Aromatique, Inc. Director since June 1993 Background: Manufacturing and marketing of decorative fragrances Committees of the Board: (1) Audit (2) Corporate Development (3) Corporate Governance...

  • Page 86
    ... President-Strategic Initiatives and Human Resources Stanley T. Sigman, 59 President and Chief Executive Officer-Wireless John T. Stankey, 44 Group President-Operations Support Randall L. Stephenson, 46 Chief Operating Officer Rayford Wilkins Jr., 55 Group President 84 : : 2006 AT&T Annual Report

  • Page 87
    ...Securities analysts and other members of the professional financial community may call the Investor Relations staff as listed on our Web site at www.att.com/investor.relations. Written Requests Please mail all account inquiries and other requests for assistance regarding your stock ownership to: AT...

  • Page 88
    AT&T Inc. 175 E. Houston St. P.O. Box 2933 San Antonio, TX 78299-2933 www.att.com